Episode Transcript
Brenton: September is Life Insurance Awareness Month, and in honor of that, we're giving you an episode where we share 10 truths that you need to know about life insurance. Let's get started.
Brenton: Hello, my name is Brenton Harrison of New Money, New Problems and your host for the New Money, New Problems podcast. I hope you all are enjoying the last few weeks of summer. We are getting to the end of September and a lot of stuff is happening in October. We've [00:01:00] talked about the start of student loan payments, but September itself is actually life insurance awareness month.
We haven't done a lot, if anything about life insurance on this podcast. And I did not want the opportunity to pass without covering at least something to honor life insurance awareness month. And we're going to have some episodes later on in the podcast where we get into the details of everything that we share in this episode.
So we're hitting things at a high level, but I wanted to give you a quick episode where I shared 10 truths that you need to know about life insurance. The first truth is that term life insurance is the best, most cost effective way to cover a temporary need, but buying it to address a permanent need will just cost you more later. So let's break down the difference between term and permanent life insurance. Term insurance is temporary.
It is for a term of time. You have policies that will give you coverage for 10, 15, 20, 30 years. And the way it works is that you have to die within that term that you've purchased in order for the life insurance policy to pay. As an example, if [00:02:00] I have a million dollar term for 20 years coverage, I have 20 years from the date that I purchased it in which I have to die, otherwise the claim will not pay.
Now, a lot of people don't think that that's a good deal, and they see these statistics online where people will say that 90 or 95 or 99 percent of term policies never pay their death benefit. But that's not because the policy doesn't work.
It's not because it is defective. It's because term life insurance is typically purchased when you need a large amount of life insurance to cover a temporary need. A temporary need, for example, may be The fact that if you die right now with young children, there's a period of time that's a temporary period of time in which they live in your home and are dependent upon your income.
So you may need a lot of coverage right now, but you may not need that coverage 40 years from now. So the term that you may purchase may be for 20 or 25 years to cover the length of time that they may be in your household.
And when it comes to life insurance, the pricing of term life insurance is much more cost effective than [00:03:00] permanent insurance a number of factors that go into the pricing of life insurance.
One of those factors being how long you're covered for. If you have permanent insurance that never expires, then the life insurance company knows they're going to have to pay that claim, and as a result, they're going to charge you more money for it. With term life insurance, they have actuaries that are assessing the likelihood that you die of natural causes at certain ages.
And if you're 25 years old, buying a 10 year term policy, they know that the odds are that you're not going to die of natural causes by the time you're 35. And as a result, they can charge you less to cover that risk, which is smaller to that company.
Now, permanent life insurance is something that for many people they just think of permanent life insurance being whole life insurance. Whole life insurance is just one form of permanent life insurance. And under that umbrella, there are many different types of permanent coverage. But the premise of permanent insurance is that it never expires. Now in later episodes, we'll talk about some things that you might have heard about whole life insurance or permanent [00:04:00] life insurance, whether it is actually an investment, how it accumulates cash in some scenarios.
But what we're covering today is the fact that it is permanent. It never expires. As long as you pay the premiums, at some point in time, you will die. And at that point in time, the life insurance company will pay the claim.
And because a significant portion of the pricing of permanent insurance or any insurance is based on your age at the time you purchase coverage, if you conflate the two, you can run into problems. If you try to cover a temporary need with permanent insurance, it could cost you more than you need to pay.
But if you try to cover a permanent need with term insurance and wait and wait and wait to purchase that permanent coverage, then it can cost you a significant amount down the line as well.
Number two is permanent life insurance is a tool that fits some needs. It is not the tool for all needs. We don't have to spend a lot of time on this. But the one thing I can say for sure is that permanent life insurance is a tool and in some capacities it can have some investment components.
It is not an [00:05:00] investment. And it is definitely not something that replaces your need to do things like your 401k, your brokerage account, or having an emergency fund. It is one tool that you put in your toolbox for certain scenarios. It is not the only tool that you have in your toolbox that you pull out for every scenario.
Number three is the life insurance at your job is the dessert that your family might get after they eat their dinner. And dinner is Individually owned life insurance, but if you try to avoid buying them dinner, they may not eat at all. I come across people all the time who work in corporate America who have life insurance that they purchase through their employer. And they're using that in some cases as an excuse to not purchase coverage in their individual life because individually owned coverage is often a higher expense.
Now there's many reasons for that. We're going to give this its own episode at some point in time, some of the deficiencies that you find in group life insurance through your employer. But suffice it to say there are many deficiencies and scenarios where that policy [00:06:00] may not pay.
I can say that if you are in good enough health to purchase and secure your own life insurance coverage, there are several reasons- I'm going to ask you to trust me until we have that full episode- that you want to have that life insurance at your job, be the icing on the cake or the dessert. That they're not depending on, but it's a positive if they happen to have it. But the actual meal, the thing they depend upon if you were to die, needs to be individually owned coverage if you have the health to secure it for several reasons.
Now, number four is a caveat to that point. Let's say that for some reason you are unable, due to health circumstances, to purchase your own individually owned coverage.
In that scenario, since you can't go get it, you need to buy as much from your employer as you possibly can. Many employers have a base amount of life insurance, where they might charge you an extremely low amount of coverage for it, or it might be employer paid, meaning you don't have to cover it at all.
then they often have something called supplemental life insurance, where you can purchase for a lower price than what you [00:07:00] typically find in individually owned coverage.
A significantly higher multiple. And if for some reason your health doesn't allow you to get that individually owned coverage, that supplemental life insurance is something that you should secure as much of it as possible, because now it may be one of your only options.
Number five is a quick one. Some life insurance is better than no life insurance, but don't use that as an excuse to not buy more life insurance. If I come across 10 different high income families, it's highly likely that even if they believe strongly in insurance, that they purchased insurance years ago when they were making significantly less money, Or had less children or had less debts or less responsibilities or some combination of all of those things.
And what you don't want to do is lean on the fact that you have some coverage and have the assumption that that means you have enough coverage and you don't need to purchase more.
So after the break, we'll go through the last five things and we'll bring this thing on home.
[00:08:00] [00:09:00]
Brenton: Number six are two quotes that are two of the most damaging phrases that you can hear in your community, especially the black community and the minority community. Those quotes are, My family just needs enough to bury me, and I'm not trying to make nobody rich off my death.
Incredibly damaging. I can tell you that one of the most cost effective ways that you will find to leave a legacy to your loved ones is through the purchase of life insurance. What you do when you're purchasing life insurance is for pennies on the dollar, you are shifting the financial risk of your death from yourself to the insurance company.
And if you've done really well, life insurance can have several uses in terms of equalizing the estate of your heirs. And if you haven't done really well, life insurance can be the only thing that can provide that legacy if you have not saved enough to do so. But I want you to understand that there is a reason, there is a history to why these types of quotes are thrown around in our community.
There are several [00:10:00] lawsuits where people have successfully proven life insurance companies have used predatory practices to prey on minority communities, that they found a way to not pay claims when people have died and their families should receive those funds, that they've pushed expensive policies on these communities, that the people who are signing up for them didn't understand.
All types of things that could have gone on in your family history that might lead to your grandfather or your grandmother or your great grandmother to say, I'm not trying to make nobody rich off my death or my family just needs enough to bury me, or I'm not trying to pay for my wife's next husband's house. All types of things that you hear.
But the fact of the matter is we need to address and reject that history and move forward with the understanding that life insurance is a legacy creator that we need to take seriously.
Number seven is reviewing your insurance beneficiaries when life changes is as important as buying coverage in the first place.
Life changes and oftentimes it changes unexpectedly. You might have as a beneficiary a parent who has [00:11:00] since passed. You might have a A spouse that you have since divorced, you might have a child that was under the age of 18. And there are many reasons why you would not want to leave money to a child under the age of 18.
If you haven't done your estate planning and your will and trust planning. So as life changes, you need to make sure that you do a sweep, once every couple of years or once every year, where you check not only your investment account beneficiaries, but also your insurance beneficiaries to make sure that they still fit your needs. I can tell you from experience where we've come across couples where a person has divorced and remarried their current spouse, but has their ex spouse on their beneficiaries.
We have come across families who don't have a will but have their beneficiaries listed as their children. And if you're under the age of majority, they have no ability to make financial decisions on their behalf, Which means that a court of law may choose the least financially responsible member of your family to determine what happens with that money because they don't know that history, only you know that history, and your beneficiaries [00:12:00] reflect those desires.
Number eight is when you're young, buy affordable term insurance based on what you're projected to make, not what you currently make. Otherwise, you'll just end up replacing your coverage over and over. This is something we've talked about with houses in the past where I am not a fan of people buying a house based on their current income all of the time.
Now, if you're in an occupation where you know that that income is not likely to change significantly, then that's a different story. But if you are early in your career and you have a young family and you know that you're going to double or triple or quadruple your income over time and you have the money to do so now, why would you purchase coverage on your current salary of 30 or 40, When you're on a career trajectory to make a hundred or 150, 000,? Do some projecting to lock in the cost of that coverage now, when you are as young and presumably as healthy as possible, because if you wait until you're actually earning a hundred, hundred and 50, 000, you still need the coverage, but you're [00:13:00] older, maybe less healthy, and it's going to cost you more to purchase it at that time.
Number nine is in 14 years of working with people's finances, I have never found a scenario where it made sense to purchase mortgage insurance. If you're unaware, mortgage insurance is almost like a sinking insurance fund. It is tied to the balance of your mortgage. And if you were to die, it pays off your lender in the event of that death.
But also with mortgage insurance, if you owe 500, 000 at the time you get the mortgage, it pays 500, 000 to the lender. If you owe 200, 000 at the time you die, it pays 200, 000. So why not just go get a 500, 000 policy on your own or through your employer so that whenever you die, your family gets 500, 000 no matter what and they can choose what to do with it as opposed to just sending that money directly to pay off your lender.
Number 10 is when calculating your life insurance need, make sure you know which debts your family would have to pay if you die and which debts die with you. Now there are [00:14:00] debts that your family may still be responsible for if something happens to you. If you signed up for a debt with your spouse jointly, then even if you die, they could be responsible for that debt.
But there are some debts that die with you. One of the biggest ones that we cover on this podcast is Federal Student Loan Debt and many forms of Private Student Loan Debt. It's important that you read the terms of any debt that you take out to understand what happens in the event of a total disability or a death, but Federal Student Loans are one form of debt that die with you.
So it's not something you need to cover in terms of your life insurance need, although there are some people who may be married to someone who also has student loan debt, And they'll incorporate that into their life insurance coverage so that if they die, their surviving spouse could pay off their student loans in the event of your death.
You can make that decision of whether you want to do it or not, but first you need to know whether it even has to be paid off in the first place because it could impact how much coverage you decide to buy. And I have a bonus for you. This is technically 11, but we're just going to say bonus. Accidental death and dismemberment [00:15:00] policies are not pure life insurance.
They only pay if you die from an accident. Accidental death and dismemberment policies are like this blend of disability insurance and life insurance, but they don't really cover many scenarios. It's accidental death or dismemberment, meaning that if you are disabled as a result of a limited series of actions that are outlined in that policy, it'll pay you a disability claim.
With life insurance, or that form of life insurance, it doesn't just pay you if you die, it pays you if you die from an accident. Accident. And as a result, people will sign up for them thinking they have life insurance and they're saying, Oh, I saved so much money because I found this policy, but you have to look and see this is not a life insurance policy.
It's an accidental death and dismemberment policy. So don't be fooled. If you're looking for insurance, purchase pure life insurance. I hope these 10 tips, technically 11, were valuable to you. In the show notes of this episode, we're going to put a calculator from lifehappens. org. They are a nonprofit that makes sure that they advocate [00:16:00] on behalf of the needs of people who need life insurance.
I encourage you if you're worried or thinking that you may not have enough coverage or you're just interested in purchasing coverage to check out that calculator. See what it says. If it says you need more coverage, then secure it and do it before life insurance awareness month ends. I'll be back with you next week and I look forward to seeing you all then.
