Renting vs. Owning Your Life Insurance

Today I’m going to start by asking a question. Would you rather own something, an asset or would you rather rent an asset. So I want you to think about that today as we have a conversation around life insurance. So this is a topic that’s not very fun to talk about. It’s a little bit morbid, but is important as we think about our overall financial picture that our insurance needs are met. So there’s really two main types of life insurance that we’ll talk about. We’ll talk about our term insurance and we’ll talk about permanent insurance. So term insurance, think of this like renting. You’re going to rent to your insurance policy for a set number of years. That could be 10 years, 15 years, 20 years, 30 years depending on whatever term length you’re looking at. After the end of that term length goes, the policy expires. Everything you’ve paid in rent, if you will. You’re not going to get any of that money back. Same if you have some sort of group term policy through your employer. You pay into that policy for a number of years. When you get to retirement that policy goes away. Not that term is bad, term certainly serves its purpose. It’s a great source for some of our younger accumulator clients because you’re able to get a really great policy for a low cost with a lot of leverage. Meaning you can get a lot of death benefit. The down side is kind of the morbid piece of the term policy is really the only way you get a benefit out of it is if you were to pass away. And of course, nobody wants to plan on that. That’s really the only way you’re going to get any sort of benefit from these policies. So they certainly have their place as far as being able to get a lot of insurance for a fixed low cost. However, as you start to accumulate more wealth, you want to explore some of these different options that are out there. One nice benefit to a lot of term policies now a days, not so much the older ones. But if you’ve purchased a term policy over the last few years, they likely have something called a convertibility feature. What that convertibility feature allows you to do is to take your term policy, convert it to a permanent policy and not have to go back through underwriting. So as we tend to get older, insurance starts to get a lot more expensive. Our health may have changed. You may want to have a permanent policy in place for various reasons that we’ll get in to. So if you have a old term policy, that’s not to say cancel it. It’s not useful. You can actually use that to your advantage by converting it to a permanent policy to leverage other goals that you may have. So permanent policies, what are those? Well these are going to be our insurance policies that have a cash value element inside of them or some sort of investment element inside of it. So they want you to think about it as renting a place to stay or you’re buying a house. So when you buy a house, you may have a little bit larger of a monthly expense. So when you’re paying your mortgage payment, there’s a few elements inside of that. You’re going to have a portion that goes towards things like escrow, so your taxes and insurance. You may have a portion that goes toward your interest and then you have a portion that goes toward your principal. That principal is really kind of the most important piece of that mortgage because that’s what’s actually building the equity. The same applies to a permanent life insurance policy. You make your monthly payment, quarterly, annually, however you decide to set that up. A portion of that payment is going to go to some sort of internal costs. We would call cost of insurance. A portion is also going to go to some other benefits we may add on to the policy with different riders that we’ll talk about in more detail here in a second. But a portion of that also goes towards building up that cash value. That cash value is going to grow and not only buy you saving into it. But it’s also going to grow by accumulation and interest growth. So these policies that have cash value also have an investment element so we can leverage that for our overall retirement planning. The key here though with these policies is not just the cash value. It’s the other benefits you can get inside of those. So you can go add things like long-term care benefits to them, accelerated death benefits, critical illness riders. All things that you may want to use down the road. So again what you can potentially do is take your term policy, convert it into one of these policies that may be more specific to other goals that have changed over time. Or you can also use these policies for some of our higher income earner individuals. So let’s say you’re a young Doctor as an example. You’re phased out of being able to save to a Roth IRAs in the traditional manner. Maybe you don’t have the IRA balances to convert or you don’t want to for tax reasons. This is another way you can start to build tax-free growth inside of your portfolio. So when we’re looking at these types of policies and not saying one is better than the other, what I do want you to take home is over time your goals maybe have changed. Your financial situation has likely changed and just as you look to refinance your mortgage on a property. It’s probably worth having a conversation maybe to look at refinancing your life insurance and trying to leverage other goals that are out there in structuring your insurance not just so much to have death benefit in place, but also how can we have more benefits from our policies either from a cash accumulation standpoint for retirement planning or protection standpoint for long-term care that may be coming down the road in 10, 15 years. So if you’d like more information on how these policies work or want to have a conversation review, we’d be happy to schedule some time to discuss in more detail. Thank you.