Insurance is not always thought about as an element of a sound financial plan. But protecting your assets can be just important as accumulating them. It’s also really important to implement the right insurance product at the right time (timing is everything, right?). Let’s dive in.

 

Life Insurance

 

There are two primary life insurance products to consider: Term and Permanent.

 

Term insurance is a temporary insurance product that is used to cover death benefits and to provide financial security to loved ones after you’ve passed away. We use the word “temporary” very loosely because (in some cases) it can last until you’re 75. But temporary is an important distinction, because Term insurance does not last forever. It is the more affordable life insurance option, so therefore it is much more common. It is also a relatively inexpensive way (in some cases) to ensure that loved ones have the financial security they need when you pass away. However, it can be used in other ways, which we will get to in a minute.

 

Permanent life insurance is exactly what it reads: permanent. It lasts forever (or until you die) and can play a significant role in retirement planning. Yes, we said it, retirement planning. Here’s how: Permanent life insurance is like buying a house – it accumulates a cash value. All the premiums you pay actually contribute to the cash value of the policy. And guess what. There is an interest rate associated with your policy, so cash values actually grow exponentially (we’ll show you a cool graph later). It also pays dividends because you are a policyholder of the company. Sounds great right? You're probably thinking: "How come this isn’t more widely known or talked about?" It’s because it’s usually very expensive and not a sexy investment (*life insurance is not an investment product*). Who the hell wants to talk about putting their money into life insurance when we can talk about the stock market!? Well kids, we’ll tell you this: it may not be your first purchase, but it sure as hell better be in your portfolio at some point.

 

• Term:

  • Think renting an apartment

  • Great for immediate protection of assets

  • An affordable way to ensure your loved ones have financial security after you're gone

    • Cover death expenses​

    • Can pay off larger expense items (house, car, loans, etc.)

    • Can provide months of income for loved ones so they do not have to worry about expenses in a time such as this

  • Much cheaper than permanent; built for everyone to have 

  • Premiums increase as you get older (mortality table)

  • How do I effectively incorporate Term insurance?

    1. Get a large amount when you’re young to get an affordable premium

    2. The younger you are, the healthier you are perceived

    3. As you are able to afford it, you can convert portions of the Term policy to permanent

    4. If it is too difficult to ever own a permanent policy (which is completely fine), you were able to insure yourself with a large enough policy to cover your expenses

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• Permanent:

  • Think buying a home

  • Same death benefit as term

  • Premiums are much more expensive

  • Builds a cash value over time

    • Premiums are paid on a monthly basis

    • These premiums increase the principal of the cash value

    • There is a fixed rate of return that helps grow the cash value of the policy

  • Pays dividends

    • Since a policyholder is considered a shareholder of the life insurance company, these policies pay dividends​

    • As dividends grow, there is a break-even point when the dividend is high enough to cover the premium of the life insurance policy

    • They are also able to be reinvested, so the cash value can grow much more quickly

  • A person can take loans from their cash value of the policy, however this does reduce the death benefit if it is not paid back​

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• Retirement planning

  • How can I use this knowledge to plan for retirement?

    1. The death benefit/cash value can be converted into retirement income​

    2. The cash value is non-taxable, so income is tax-free in retirement​

    3. Because life insurance has a fixed rate of return and is not directly tied to the market, it is a great way to diversify your portfolio to avoid sudden market drops when nearing retirement -> Let's say there is a financial crash the year you retire. Your investment accounts may see a massive hit, but your life insurance policy (assuming not tied to the market or any index funds) should be recession-proof. IF you have a life insurance policy in which it is directly tied to the markets, then this statement is no longer true and you are exposed to market fluctuations. 

    4. Because dividends can be reinvested or received, a solid idea would be to reinvest the dividends until they become larger than the premium; then you can use the reinvested dividends to pay for your life insurance policy and it effectively becomes free.

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