8. Buy permanent life insurance

This step is a bit controversial and I'm 100% okay with you skipping this step - but it's a part of my process so I'm putting it here.

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Reasons        

 

Protect your assets

• This is similar to term life insurance.

• Life Insurance provides a death benefit to your beneficiaries in the event you pass away.

• I know this is morbid to talk about, but it's very important to protect your assets during one of the most difficult times in your family's life.

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Health Advantages

• This is similar to term life insurance.

• The cost of life insurance is based on your health - the healthier you are, the cheaper the premiums will be.

• Typically speaking, the younger you get life insurance, the healthier you are deemed by underwriters, and therefore the out of pocket cost will be cheaper.

• I'm a huge advocate for getting Term Insurance as soon as possible to lock in a good rate.

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Builds Cash Value Over Time

• So this one is new and is specific to ONLY permanent life insurance.

• As you pay your premiums, you build a cash value. This is very similar to building equity in your home.

• Let's say you have a $100,000 policy - by the time you are done paying off this policy, you will have accrued $100,000 in cash value (at a minimum).

• I say "at a minimum" because there is an interest rate attached to your cash value. So, as you pay your premiums and build a greater cash value, your existing cash value will grow at a variable interest rate.

• In many cases (but not guaranteed), your cash value will exceed the policy amount, also known as the death benefit.

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Dividends

• Because you are considered a shareholder of the company, your life insurance policy will pay you dividends (again, not guaranteed).

• You can either:

  • Reinvest those dividends into the policy, therefore growing your cash value further. Essentially, you use your dividends to buy more policy.

  • Use those dividends to put towards your premiums, therefore reducing your monthly cost (and eventually alleviating the cost all together).

  • Take those dividends as cash as a form of passive income.

• Please note, dividends are not guaranteed and fluctuate based on the life insurance provider - I strongly urge you to ask your provider and confirm they have a dividend policy before proceeding.

 

Supplement to Retirement Savings

• As mentioned before, permanent life insurance has a cash value that grows over time.

• In the hopeful event you outlive your premiums, you can decide to use that fully grown cash value as a supplement to your retirement savings.

• Might sound confusing at first, so let's dive in further.

  • Let's say you have a $100,000 policy, and when you turn 65, you decide that you do not need a death benefit for your beneficiaries (this is a case by case basis, I can explain further based on the particular person).

  • So if you don't need a death benefit, that money is yours to use freely. Meaning, you have $100,000 (or more), to use to your discretion.

  • And because your premiums are after-tax contributions (you paid taxes on your income and then paid your premium), your cash value is not taxed. That's right, it is TAX-FREE. Except for interest accrued over the $100,000, which is taxable).

  • This $100,000 becomes a tax-free benefit that you can use to supplement your retirement.

 

What's the catch?

• There's always a catch, and a lot of financial gurus do not like permanent life insurance. Here's why:

  • It is very expensive. Like very expensive.

  • That $100,000 policy will cost hundreds of dollars per month. Bigger policies could cost thousands.

  • Life Insurance Agents receive a pretty commission from this, which drives the premium cost up higher.

  • It takes awhile for a substantial cash value to build, so you won't have access to this money immediately (see loans below).

  • Term life insurance is much cheaper and IRA contributions can be more affordable, so this is why this is not the first thing I suggest.

 

Tips         

 

What is Life Insurance and how does it work?

• Life Insurance is a type of insurance that pays out a death benefit to your beneficiaries upon your passing.

• You pay a monthly, quarterly, or annual amount (known as a premium) that keeps the policy active.

• A beneficiary is someone you choose to be the recipient of the funds if you were to pass away. This could be a spouse, child, parent, grandparent, aunt/uncle, cousin, or friend (I'm sure there are more options).

• Because we are talking about Term Life Insurance, the coverage period will be a predetermined amount of time stated in the policy. This could be 10 years, 20 years, or until the age of 72.

• Term Life Insurance does not stay active forever - you can (and hopefully do) outlive the policy.

• This is purely a safeguard against the worst thing happening - you prematurely pass away.

 

You can take loans from the cash value

• Yes, as long as there is enough of a cash value, you can take a loan against your policy.

• Most policies (if not all) will set terms for you to pay this money back - but in reality, you are really paying yourself back.

 

You are not your own bank

• There is a common misconception that you become your own "bank" with permanent life insurance. That is utter bullshit.

• Sure, once you have a cash value built up, you can take loans against the policy. But you have to pay that back (typically).

• It takes a long time to build a substantial cash value, so in most cases it makes sense to simply save money (and put into a high-yield savings) if your goal is to save money.

• The one thing the gurus got correct is that the unpaid loan will net against your policy. So if you borrowed $25,000 of the $100,000 and did not pay it back, then your death benefit will be $75,000.

• But what about IULs? I'm not well versed in this area (but planning on learning more), but the next section will outline why I'm not a big fan of them.

 

Strategy and Implementation

• We talked cash value, interest accrual, and dividends. Here is how I implement permanent life insurance into my financial plan.

• I have a $100,000 policy -> I don't have a substantial cash value and the dividends are minimal (this is just for background).

• I also fund my 401k, which will be my primary source of retirement income.

• However, my 401k is tied to the stock market (because it is invested in index funds), so when I retire, there is a chance that the stock market has a down year.

• I will combat this by altering my investments into safer investments (think US Treasuries, Money Market) but this isn't foolproof.

• But, guess what isn't tied to the stock market? My permanent life insurance policy.

• So, I'll have $100,000 that's tax-free to use how I please in retirement.

• Maybe $100,000 isn't a lot for retirement, but imagine that policy is $500,000? Or $1,000,000? Or even $5,000,000?

• Sure, those higher amounts are very expensive, but if you can afford it, and you follow the guidelines in order, you can have a fully funded IRA and a large permanent life insurance policy for retirement.

• Oh, and by the way, those dividends can eventually pay your monthly premium so you won't have any money coming out of pocket (if you choose that route).

 

Create a budget

• Yes, this is a recurring theme here.

• A budget will inform you on how much you can spend on Term Life Insurance. It must be a comfortable number that is within your means.