Episode 37: Life insurance 101

In this episode, Hunter discusses the process of getting life insurance, what to consider when determining the amount, types of insurance, and what to look out for. 

https://www.nerdwallet.com/article/insurance/average-life-insurance-rates

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And welcome to the 37th episode of retire early retire. Now I'm your host hunter Kelly owner of Palm valley wealth management. I do this podcast every Tuesday morning, so physicians and attorneys can retire early or retire now. So today we're going to talk about all things. Life insurance. Last week, we talked about disability insurance and protecting your income from, the risk of becoming disabled through injury or such. So this week we're going to talk about life insurance to protect your family in, death untimely death. So. Uh, today, we're going to talk about one, how much coverage do I need to, how do I get that coverage? Do I get it through work? Do I get it through a personal policy? What type of insurance is there and some pitfalls and some essentially scams to look out for. Right. And so. Uh, let's just jump right into it. Right? If you liked this podcast, go ahead and leave a five star review on your favorite podcasting app. Also, I am recording and posting these on YouTube now. So if you liked the video form a little bit better. Go ahead and subscribe on my YouTube channel. You can look me up at hunter Kelly CFP. Uh, and then also over the summer, I will be putting out some different content on there as well. Maybe some case studies, things of that nature. So go ahead and subscribe to that YouTube channel. But. Without further ado, let's get into some life insurance. So what type of life insurance is there? What should I get? How much do I need? Uh, and what should I look out for? So, uh, there are really three main types of insurance. When you talk about broad category and that is group life insurance through your employer term life insurance, which would be a personal policy and then permanent life insurance as well, which would be a personal policy. And so. Uh, generally, if you go through a group policy, there's not any, uh, what we call underwriting. So you literally at open enrollment, you say, Hey, I do want the life insurance. And so. Generally it's much cheaper because they are, um, Assessing that risk from a group standpoint versus an individual. So the rate or the premium for that policy is generally much cheaper. Uh, just like roup disability and what we talked about last week, it will be, uh, age bandit. So every, let's say five years or so that premium will increase. So if you're, um, on the older and of, uh, the age bands, then you will. Uh, end up paying a higher premium, but. Uh, if you're on the lower it's, it's very cost effective. And worth getting now the downside, a couple of downsides to the group policies. One. You probably won't be able to get that much coverage. Generally. It's only one to two times your salary. Sometimes they will have some buyout programs where maybe you get three or four times your salary. And so, uh, the, the amount of insurance is probably. Excuse me. It's probably not going to be enough. Two. Uh, cover what you need generally speaking, especially early on in your career. And then the other downside would be, if I leave that hospital, if I leave the law firm, Leave my job. Uh, you cannot take it with you generally. So, um, so those are some things that you would want to consider. I tell clients, go ahead. Especially if it's super cheap, go ahead and get it. We can supplement. Um, or it can just be an add on to what you're going to get on the personal side. And then the vast majority of clients that I have worked with over the last. Uh, se almost decade. Uh, they also get a personal policy. And so again, just to touch on that, you either going to apply for a term policy. Or what we call permanent or whole life policy, which you would have, uh, for your whole life. And so the process for that is a bit different than the group policies. Uh, So you'll work with, uh, an insurance agent that, um, we'll hopefully be able to shop out multiple companies, things of that nature, which we'll talk about here in a second, and then you will apply for that particular company for a, a policy. So whether that be a 10-year term 20 year term, 30 year term, whatever amount you need. Um, and which we'll talk about how much you need here in just second. And then you will go through underwriting, so they will ask you medical questions. Uh, generally you'll have a phone call with a nurse. Uh, and they'll, they'll dive into any procedures. You have medications, uh, other disabilities. Are you a smoker? Non-smoker. Uh, do you smoke marijuana? Do you do edibles? Like these are all questions that they're going to ask. Um, and obviously you want to be truthful. Um, because if you're not, then they're not going to insure you or your beneficiaries may not. Yeah. Get that particular, uh, benefit that you apply for. So, um, And so we want to make sure that we go through that process and then they, the underwriter will basically give you an offer and that offer will give you some sort of rating. And that could be the best rating. It could be superior where your really good health. Uh, and you're on the lowest risk of potentially passing away during that term of that policy. So your premium is going to be as low as possible are for that particular policy. But if you have health issues and maybe you have high blood pressure that you're taking medicine for, or you have some sort of other disability that, that would. Uh, deem you less healthy, then you would pay a higher premium. You may be standard or substandard, what they call rated. Um, and so just be aware of that. Um, if the insurance agent quotes you a super low price and you didn't disclose to him that you have diabetes or something like that, and it comes back much higher, that would be why it would, it would come back higher. And so you just want to work through that. And make sure that you're very honest, upfront and honest with the agent because some. Some insurance carriers like a certain type of insured people better than others. So some insurance carriers, if you're a smoker or you do truly tobacco things of that nature, they will. Uh, rate you better because that's the market that they want. Um, they can just price it better at that market versus if you were somebody that's super healthy. And so there's, there's an insurance carriers that do really well with super healthy people. Right. And so you just want to be up front with that agent, um, to make sure that he or she can. Shop out the best company because they have experience with which companies do well with certain types of people. And so once you go through that process, get offered, then you would obviously sign all the paperwork documents and you would be insured. And so the next question is, well, how much insurance do I actually need? Right. And so the general rule of thumb is somewhere between eight and 10 times. Your salary. And, um, some other things that you would need to consider because everybody's different and they have specific situations. So, um, obviously eight to 10 times is very general. The other things that you'd want to consider, especially if you're coming out of law school or residency, you may have lots of student loan debt. Uh, you may have just bought a house. So you have a new mortgage. Car loans. Uh, maybe you got married, you have kids, things of that nature. And so we want to make sure that we're considering all of these things and making sure that the money that we're applying for, the benefit that we're applying for. I would cover these in the event that I have on timely death. Right. Um, So. So we want to make sure that we are properly insured. And the best way to do that. The most cost-effective way to do that is through term insurance. And like I said earlier, term insurance is basically renting insurance, if you will. So. You go to the insurance agent and you say, Hey, I need a million dollars. Or you guys work together to determine that you need a million dollar policy and you need it for 30 years. When you apply for it, you get it. You sign up, you're paying the premium as long as you pay that premium each year or each month, however, it's set up. Then you will have that million dollar policy for the term of the agreement on the contract. The other side to that is a permanent insurance or whole life insurance. So let's talk about how permanent insurance works. So. Generally, uh, you'll apply for either a whole life policy or what we call a VUL or universal life policy, but we're going to stick to whole life just for the conversation of today. And with that policy. Uh, the selling point is that you're going to have one. You're going to have insurance for your whole life. And two, you're going to be able to build cash value within that policy. And so. What I often see, and I'm a little soap box here. Uh, what I often see is that these insurance salesman come in from these big entrance companies that you see all over TV and, uh, ads and things of that nature on social media. And they come in right after you're done with residency, or right after you're done with law school. And they try to sell you these large policies and sell you this dream of you're gonna have all this tax-free money and this life insurance policy and so on and so forth. Right. And so let's get down to actually how this works, right? So you give, uh, the insurance company the premium each year because you're building cash value. That premium is going to be much higher. So let's compare, uh, what that premium would would be like to, uh, to similar policies. Right? So if I'm applying for a $500,000, 20 year term, and I'm around 30 years old and I'm healthy, it's going to cost about 187. Dollars a year. Uh, for that policy and I'm getting this information on NerdWallet. Uh, I'll link the description of the website or linked. The website and the description. So that you can see this article. And then the same policy for a healthy 30 year old $500,000 worth of whole life insurance. Is $4,200. So you're going to pay 21 times. Uh, the amount of premium to this whole life policy. Now, what they're going to sell you on is that you're going to build cash value within a policy. And so how is that going to happen? Well, the insurance company is going to essentially guarantee you. Let's call it a dividend. And it's not a dividend in a traditional sense. It's basically they put this cash from this money that is considered your cash value into a general fund. And then over time if the company does well and basically if they sell more insurance, They're going to give you a dividend. And so sometimes that dividend is guaranteed. Sometimes that is not. And so obviously the guaranteed one would be better because you at least know what you're getting. Right. And so what they don't tell you is that the guaranteed interest rate, whether that be 3, 4, 5, 6% is not off the $4,200 a year that you're paying. It's off the money that is going to the cash value. So you have the insurance, you have to buy. You have administration fees. You have, uh, commissions that need to get paid. And oh yeah. If you change your mind between the first 10 years, you're going to be charged a surrender penalty so that the agent and the company can still be compensated. And so. Um, the reason why these light to get sold. Is because they have very high commissions. So if I'm a, if I'm a quote unquote financial advisor, And I come into a physician's office or I come into a residency program and I'm trying to make money and I have this option to sell this policy that is going to be. Uh, $4,200 worth of premium. Or this policy that is to basically $200 a year. Well, I'm going to make a heck of a lot more money on this policy that is going to make me more money. And so the training, uh, If these companies are all around that because the companies know that they'll make more money. And, and so what they're going to sell you on is what's called infinite banking system, and I'm sure you've heard of it. Um, but we kind of laugh at these people and the industry is it's kind of ridiculous that they can get away with this sometimes I feel like, but, um, so they're gonna say, Hey, you're going to have all this cash value. So on and so forth, and you'll be able to take loans off of this. And this is what well wealthy people do because you get tax advantaged. Um, it's basically like a tax advantage account. Well, yes, it is tax advantage, but the amount of growth that you're going to get inside of these life insurance policies is not. Uh, necessarily the growth that you can get somewhere else. So if you compare the history of these whole life policies versus the history of the market, the market. Uh, vastly outperforms, what you would get inside of, uh, one of these whole life policies. The best way to maximize your dollar would be not to buy this whole I policy. It would be to buy the term policy for $200 a year. And then become self-insured because you took the other $4,000. Uh, a year and put it into a well-diversified portfolio based off her wrist, harness, things of that nature. And got a much higher. Uh, Rader return. Now, obviously the market is not guaranteed. You could have muted returns for a very long period of time and, and underperformed the whole life policy, but the likelihood of that happening based off history. Uh, is a lot less than you putting that money into the whole life and outperforming. So. So what I'm trying to say here is get term. And then invest the rest. Right. And, and don't fall for the insurance salesman, um, coming in and trying to sell you this pipe dream. It's not what wealthy, wealthy people do. They don't take loans off their whole life. When Elon Musk bought Twitter. He did not go to his insurance agent and fill out a form to take a loan on his whole life. You know what he did. He took a loan off of Tesla. His Tesla stock to buy a Twitter. Right. And so that's what wealthy people do is they have these. They Sue Uber wealthy. Obviously they start a business. They own stock in that business, or they don't really well investing in other businesses. And then they take loans off of those. Uh, so they don't have to pay taxes. And so that's a whole nother thing that we can get into in a different podcast, but wealthy people do not buy a whole life to. To create an infinite baking system. They create companies to create wealth, to become infinitely wealthy. So, um, so don't fall for the whole life trap. Get term insurance, uh, Invest the rest into a, a portfolio, whether that be in your Roth, a brokerage account, 401k, things of that nature. Um, So that you don't end up at the end of your, your working career and going on, I don't have as much money as I thought I would. Based off this illustration that the insurance company gave me 20 years ago. So that'll wrap up the podcast for today. Hopefully you have a better understanding on how to get insurance. What that process looks like, what to consider when determining how much insurance you would need. Um, And one thing I didn't talk about enough that I feel like I should mention one more time. If you're going to get insurance, make sure you get with an independent agent that can shop multiple companies. Uh, to find you the best rate, so. Uh, make sure that you're shopping that out. And if you like this podcast, go ahead and share this with a friend, uh, leave a five star review. And if you would like help on your specific situation, you can always go to my website, Palm valley, wm.com. Go to the process. Page book, a call. Uh, would love to talk to you about your insurance needs to help you out, figure out how much you need, and then get you with an insurance agent to help, uh, implement that plan. So, uh, boy, we'll see you in the next one. This podcast is for educational purposes only. It is not meant to be financial or investment or insurance advice. If you need help on your specific situation, please reach out to a financial legal tax or insurance professional. To help with your individual situation, please keep Palm valley wealth management in mind when making those considerations.