The Wonderful World Of Life Insurance

Welcome to another episode of Mr. Stillman's openness Walter sort out your host today alongside John Stillman, the man returned to for guidance and advice in the financial world and Jon, I see that the headline of our topic today is life insurance. Why in the world would we bore ourselves and listeners with such a topic you realize that our goal on the podcast is actually to get people to listen to all of it not to do now to me.

So thank you for that wonderful setup. Well, I know that the good news is that you do tend to take topics that I think the outside world would view as somewhat boring and make it interesting or at least applicable to our everyday lives. But maybe that's where we start. We talk about life insurance. Why is there that that cringe worthy almost nails on a chalkboard type feeling whenever something brings up life insurance, summing Groundhog Day perfect example like how they pick on Meda like that right yeah yeah well, he's sort of your stereotypical life insurance salesman right and that's all you do is sell life insurance going to be pushing it on people. Weather makes its warm and awesome. I think there have been a lot of people in the history of America who have only sold life insurance and therefore they have become Ned Ryerson in real life, so that stereotype.

As with most stereotypes exist for the reason is there's some truth in each of those stereotypes, but the other thing is, people just don't like to talk about it because it has to do with dying right center. I mean, you're either buying life insurance on yourself to take care of your family. If something happens to you or your buying life insurance on somebody so that you'll be taken care of if something happens to bit. Neither is a particularly pleasant discussion with maybe one exception, who is a client of mine who went through a very nasty divorce and as part of the divorce decree. She still gets half of her husband's pension which is a substantial pension about his part of the divorce decree he has to maintain a life insurance policy on himself. Because if he died, she wouldn't have that pension anymore. He has to have life insurance on himself or her, so she was talking about how insurance because it is a win-win area pretty much but all joking aside, this about the only time I can think of where you guys really wanted to the emotional attachment to life insurance is usually of a much more than I was a negative but it leads to avoidance people and talk right and so a lot of people think of life insurance is something that they need to take care of their family while they are in their earning years in case something happens to them so that you not like the classic example is you know have a young couple and their both make in $60,000 a year. They each have. Let's call it 10 times their income maybe five times her income. Whatever, that's their death benefit. On a term life insurance policy so that if something happens to them. Their kids are taking care of right then you say all right well the kids are grown and gone out of the house. Colleges paid for.

Do we still need life insurance at that point will maybe maybe not. It could be that the reason to have life insurance is completely different. Like let's say for instance that couple but I just reference that was divorced would say they were still married, but he didn't have a spousal benefit on his pension.

Let's say he's getting $6000 a month and he dies. Not gonna let the big income gap for the widow to make sure night. If so, we want house life insurance on him for other people. It's an estate planning issue so life insurance proceeds. Of course, pass tax-free to the beneficiary rights of very wealthy people who are actually concerned about the tax implications of their estate will often buys much life insurance companies will sell because that's how they can transfer wealth to the next generation tax-free self is not as simple as the use of life insurance that most people think of it.

In other cases, there are situations where maybe people want to add liquidity to their state.

So, let's suppose you. Here's an example from a client, they inherited the farm and is about 45 acres. Not a big income producing form. Just a lot of lintel had a lot of value, but not a lot of cash flow not really any cash flow.

To be honest, and so the problem was you about the market value of that farm was probably close to $1 million.

But the problem must've been here the tax bill is huge and so there was nothing else in the estate. She just inherited land and that was it.

So it's not like it was producing any sort of regular income for them or was using the crops or had any sort of workability, and then that there were people working it, but it wasn't really making a profit to the person who owned the Washington County and he got to the point where after a year or two.

She was having troubles paying the taxes on the land and so instead of having a million-dollar property she decided look I need to sell it and I get it sold quickly and associated upsell it for like 550 or 600,000 because she had to get it moved over so she literally get the value out of that she could have if her dad at even a small amount of life insurance to add some liquidity to the estate she could've paid the taxes on it long enough to get the price that she wanted for interesting so could have been using that situation really. Just as a buffer today to give you some extra time so you're not rushed into a decision that that seems like a very creative use of life insurance. Yes, so if you have a very illiquid estate on the properties in might make sense to have some life insurance and there you have to have a huge amount, but just enough to make it easier to administer the estate for one and for some people it's you don't, maybe you have a lot of assets but they're all in IRAs. If you're passing $1 million in IRAs to your kids while you also want them to have some tax-free assets to to deal with so there are a lot of legacy planning issues that you weren't where it might make sense for you have life insurance even if you don't need it to take care of somebody. It's it's a little better.

We still are all dealing with people dying in order to realize the benefits is, is there any particular use of life insurance that would benefit someone while that is a deal with death while they're still lives in rare situations. Yes, so as an example for people who have really high incomes you can actually use life insurance as a way of investing for future income and I'm not real crazy about that in most cases, I've only really seen a few cases where it actually makes sense, but if yes, but who has a really high income they can't contribute to a Roth.

They can even contribute to an IRA and get the deduction they're very limited on what you they can max out their 401(k). Let's aim making half $1 million a year and can max out your 401(k) at the $24,000. If you're the age of 50.

But other than that all of your savings are in after-tax accounts.

It would be nice to have some place where you could save tax-free down the road while we are determined to make too much to contribute to a Roth. The other two options are municipal bonds almost as boring and hard about his life insurance and life insurance. So what you can do is essentially over fund life insurance policy and any borrow back from the cash value of that policy to give yourself income down the road, but there are actually some policies that have some pretty good growth potential within the cash value if you do it right. It's a little bit of a complex way of doing things. It really doesn't make sense for the overwhelming majority of people, but for some really high income clients. It has been logical. We found the exception to be able to unite a wider stillness. Now there is also the living benefit idea of life insurance now. This is also not a fun thing to talk about because now talk about nursing home or assisted living but the way that works is let let's say that you have a $250,000 life insurance policy on you when you die. Connie gets $250,000. Very simply brightness. We will tell her that because we don't want you worth more dead than alive.

But how it works sometimes. However, let's say you were going to the nursing home while you can use that $250,000 to help pay for your care, not a lump sum but they might give you 1/4 of it every year for four years but that seems useful. So yeah, I mean if you get $16,000 from that policy for four years yes is not any death benefit left to pass on but you've at least prevented the remaining spouse from having to spend down all the accounts to pay for your nursing care.

So I get another pleasant conversation. But that is a good use of life insurance. Some people have a ton of all life insurance policies that they just need to scrap just need to not have like I had been waiting here a few weeks ago, who she has I think three or four old life insurance policies, none of which she really needs at me. She needs a little bit of life insurance to help with the estate plan, but she didn't need the $600,000 of coverage that she had so we basically scrapped all that got a new policy for about hundred thousand dollars which was all we determined that she needed now she's paying much less in premiums every year, but she still have the coverage that she needs so in a lot of cases, people are still paying on all policies that they had for years. They really there's no need for them to keep Dr. so it was starting the life insurance conversation actually could save people money. If you uncover situations like that work ways to be more efficient in your coverage right and really the way to save money and this is nothing people don't understand is that life insurance is the one thing other than big-screen TVs that have gotten cheaper over the years. Reason for that is, people are living longer.

Right. So as life expectancies increase life insurance companies can collect premiums longer. Therefore, it cost you less to buy life insurance aware is it may have once cost you hundred dollars a month to have a certain amount of coverage you might be able to get that same amount of coverage today for $70 right so that's something that people don't understand about the old policies that have a well I got this back in the rain the late 90s. It's probably a really good deal compared to what I have now actually probably not. You could probably get the same thing much more cheaply. So the other advantage. There is, let's say you have an old whole life policy and your pay in let's call it $100 a month and you have a cash value of $50,000 in that account.

Pick a nice gift was called half-million dollars.

Half-million dollars death benefit were paying hundred dollars a month we have a $50,000 cash value that built up what is completely possible that with today's rates being what they argue could take that $50,000 cash value move into a new policy and never pay premiums again. So you just cut up $100 a month and essentially take that $50,000 as a prepayment on the new policy and you're done. No more premiums to be paid, or at the very least pay a lot less than the hundred dollars a month that you have been paying and keep the same coverage so that's an example of when it might make sense to scrap an old policy certainly don't want to open old policy and then wait for the underwriting process to go through on your new policy because what happens if it comes back and they find out that your bad health and you either are uninsurable or it actually does cost more than you're expecting will now have a problem right to keep your policy in place.

You get the new one and then drop you make sense.

So I know that there's always sort of a debate for folks who were in that younger stage of life you get term to get whole, universal, what about folks who are approaching those retirement years.

Maybe 5 to 10 years away your distorted retirement is it is the debate the same as a change when you're talking term whole, universal. It is a different type of policy for a different stage of life. So for you now for me now for almost anybody in the younger stage of life term is going to be awake. However, as we are getting toward the end of life very often, especially for using it for estate planning purpose. Yes, we will some kind of permanent policy usually universal life policy. If we want to have the believing benefits like we are talking about for nursing home use. That's going to be a universal life policy in almost all cases. So yes you just want to be sure that you're using the right policy for the right stage of life term life insurance would be more for income replacement for a certain stage like we have to get through this age or get the kids through college or whatever throughout that term, we want have coverage. That's your use of the term policy. If you're using it more as a financial planning instrument other than just income replacement to then were looking at different types of policies just make sure you got your beneficiaries correct right all one look at you the last and last point we should probably get a set be sure your beneficiary designations are up-to-date. The classic example of course is of married couple gets divorced husband remarries and dies. Never thought to update his beneficiary designation ex-wife who he was on good terms with this. Still, the beneficiary in his life insurance policy that goes to her.

His actual wife who he would've wanted to get it gets nothing. Regardless of what he says in his will. The life insurance beneficiary dictates who gets them and you cover that kind of stuff in a review of the subject yelled check every year, going over your your annual review. All right, let's review your beneficiary designations on everything that is life insurance with IRAs any accounts that have a beneficiary to be sure those are still who we want to conversation and we made it through the whole conversation without falling asleep seamlessly so that eventually… There you go. That's the skinny on life insurance if you will. And this is been Mr. Stillman's opus