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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to How to Retire On Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice. This show is all about getting into the details so so you can determine what is right for you. As always, text your questions to (913) 363-1234. And remember, this show is not financial advice.
Mike:It's information to continue your exploration. With me in the studio today, mister David Fransen. David, thanks for being here. Yes. Hello.
Mike:Thank you. David's gonna read your questions, and I'll answer them. Let's jump in.
David:Hey, Mike. I have a life insurance policy, but don't feel I need the death benefit anymore. What should I do?
Mike:Yeah. Let me talk about life insurance generally first. Okay. And then dive into this question. So first and foremost, what's the purpose of life insurance?
Mike:It's to pay for a death benefit in case you die.
David:Yeah. Makes sense. Right? You're sort of trading this, like, well, I'm gonna give them my Yeah. Premium, and then
Mike:Now, David, you're a father.
David:I
Mike:am. Your wife is a dentist? She is. You both have income. We do.
Mike:How detrimental would be if one of you just died?
David:Yeah. I mean, we yeah. We depend on each other. That that combined income stream is crucial. It's nice.
David:Would you consider term life insurance just to bridge that gap?
Mike:Yeah. What's your expectation to get your money back if neither of you die with term life insurance?
David:Well, mean, yeah, we had to go into it knowing that, okay, we're gonna pay this just in case, but if no one dies, then a, we're happy that no one died. Yeah. But b, we have to also be okay with, well, we just gave them a lot of money for decades.
Mike:Yeah. But and I'm being a little facetious here. People listening are probably going, well, duh, Mike. Yeah. Well, hold on.
Mike:Okay. That is what life insurance is. You are paying a fee to an insurance company for the death benefit so that in case someone dies, you receive a large sum of money to offset the lost income or lost cash opportunity for whatever that may be for your situation. That is the purpose of life insurance. It is not an investment.
Mike:Yeah. Now with that understanding, as you approach retirement, there's a couple of different questions. First off, you have to ask yourself, if you have term life insurance and you're entering retirement, do you wanna keep that term policy or not? There's no cash value associated with it. It's term.
Mike:Yeah. That's it. Right? So do you keep that term knowing you're paying a higher premium or not? Do you delay your Social Security knowing that the term, if you were to die sooner, that death benefit would offset the potential loss of revenue from Social Security?
Mike:Like, you could play that game if you really wanted to. I've seen that happen to certain people that just wanted to transfer that risk to an insurance company, but they knew that the odds were not in their favor, that they were healthy, and they probably wouldn't die. And that's how you gotta think about this is whenever you're dealing with an insurance company, the odds are not in your favor. That's how insurance works.
David:We just have to accept that and be okay with it, and understand that that's there's nothing wrong with that. Right?
Mike:Nothing wrong with that. Yeah. That's like getting upset with Coca Cola because they make a beverage that may not be considered healthy. I don't think Coca Cola has ever come out and said, hey. This is a healthy beverage.
Mike:No. They say it is a refreshing beverage. Yeah. I don't know. And it lives up to the claim.
Mike:Yeah. I like Coca Cola more than Pepsi.
David:Yeah. Oh,
Mike:yeah. That's a famous dispute. Yeah. But the the point is, let's not assume that something is what it is not. Life insurance is not an investment.
Mike:Now it gets a little bit more tricky when you move into permanent life insurance. What's permanent life insurance? This is universal life or whole life. Now there's different categories within those types of life insurance. You've got on the universal life side, you've got things like indexed universal life, so it has growth on the upside, but no downside risk, just in fees.
Mike:So if the markets go down, you don't lose value, but you do pay fees. There's universal life where it's kinda like this not exactly fixed, but roughly just kinda steady. It grows at an arbitrary rate, and then you've got variable universal life where you've got more upside potential, but you've got downside risk as well. K? So you've got three different ways you can slice that one up.
Mike:And then whole life, similar in that situation as well. They're just structured differently. As I'm going to define it, knowing all policies are structured a little bit differently, universal life, as I've seen it, tends to front load the fees, so that after ten years or so, then it's a little bit lower typically in fees for the long haul. Whole life, kind of as I've seen it, spreads these fees out for the rest of your life. So they're just structured a little bit differently.
Mike:Is one better than the other? Who's to say? Depends on what you want. But when retirees will get to retirement, they're now second guessing, should they keep buying into the policy? Should they not buy the policy?
Mike:Should they cut the policy? And that's a very loaded question. So just so we're clear, to the person that asked the question and to everyone listening in, I am not gonna tell you to cancel your life insurance policy. This show is not giving individual financial advice. This is a discussion, and I'm gonna point out a couple of things to consider.
Mike:That fair? Sounds fair. Yep. K. The first one is understand what you're paying for.
Mike:Are you paying for riders and additional benefits with the policy? Those additional riders and benefits would cost you money. Do you still want them, or do you not want them? Only you can really decide that. Understand the fees associated with it, and know that the older you get, there may be an increase in those fees.
Mike:There may not be. There may be. Just gotta look at the details. And you can call the insurance company. They'll answer these questions.
Mike:Mhmm. They don't hide things from you. They're just complicated policies. Yeah. The next one is how large is the death benefit compared to the cash value associated with the policy?
Mike:So generally speaking, with a permanent life insurance policy, you would fund it until you don't need to fund it, and the cash value and the growth associated with it should maintain the policy until a certain point.
David:Okay. So the growth of the policy, and the company can pull out of the growth to pay the fees? Yeah. Okay. Yeah.
Mike:Yeah. Now let's be a little bit, I don't know, sarcastic with this. Just for a moment, I wanna prove a point. Let's say your policy has 50,000 in cash value, and the death benefit is $100,000. Alright.
Mike:So the death benefit's like 50 k. Do you think that's gonna cost a lot of money? No. That's not a lot of money out for the insurance company, so the cost of insurance is gonna be very minimal. And that policy, you should be able to structure to where you stop paying into it, and it should sustain itself.
Mike:And as the cash value grows, the death benefit might grow with it, because there has to be a corridor or a difference between the death benefit and the cash value. So you might say, look, you don't need it, but there's enough cash value. The fees associated with it are small enough. Just let it ride. And that's a very common situation that I see.
Mike:It's not paying into it, but we just do a real illustration, we restructure it, and then just let it be. You've already paid into the policy, you might as well just let it grow tax free. Maybe you borrow against it tax free. Maybe it's just there for the beneficiaries whenever you pass. That's okay.
Mike:Now let's say you've got that 50,000 cash, and there's, like, a $500,000 death benefit. K? A $450,000 death benefit. Do you think the fees associated with that are greater?
David:I would guess so. Yeah.
Mike:Yeah. Of course they are. Yeah. Because there's more risk to the insurance company, and so you've got to pay to compensate for that risk. So you've got to ask yourself a question, are you willing to maintain payments to keep this policy alive so that you have that $450,000 or so death benefit in case you were to pass?
Mike:These are kind of the questions you've gotta ask yourself and go back and forth on. Is it right for you, or is it not right for you?
David:And so who are these policies for? Like, permanent life, whole life, like, who's that really for? Is it for a certain high net worth person? Is it for the
Mike:I've seen people use let's do whole life.
David:Okay.
Mike:Whole life's the old school one. I don't see them written as much. It's just it's the old traditional one. It's steady, Eddie, it grows. Ideally, you put enough into it.
Mike:At some point, you can stop paying into it, but it's just kind of the most boring of them all. Boring isn't bad. Boring means predictable. No problem with that. The newer policies I've seen typically fall under the universal life umbrella, which is a newer type of life insurance as I've understood it.
Mike:Just on the new products that are available, the new innovations they've done, they seem to be focusing more on universal life. And that's where I see, like, hybrid plans where it's like, hey. There's a long term care benefit that if you qualify, you could tap into your death benefit, because if you need long term care, you're kind of on your way out. That's the harsh reality. So they're gonna pay a death benefit anyway.
Mike:They kind of just make it a little bit easier for you to do that. Now that might lead to higher fees. There's always a catch to these things, But I've seen people say, well, I can't afford long term care, but maybe I'll do universal life and kind of do these hybrid plans. So that's for someone that's typically a little bit I don't know. These aren't cut and dry numbers, but maybe 2,000,000 or less might consider something like that, if that's what they wanted.
Mike:The million dollars or more, I've seen people use universal life for tax planning, but let's be very, very clear. Life insurance is not an investment. You don't buy it unless you want the death benefit, and it's probably not gonna outpace the stock market over the long term period of time. So when I hear people say, well, this is the rich man Roth, it is not. Okay?
Mike:Mhmm. That is a tale that has been manipulated to sell you a life insurance policy. People might say, well, this is how you pay estate taxes. Well, when are you expected to die? In your eighties.
Mike:When did you take out the policy? In your sixties. If you compare the premiums you put in to your life insurance policy and compare that to, let's say, a 7%, 8% average growth, you just put it in the stock market as a difference, by the time you got to your expected death date of mid eighties, you would have had a greater death benefit just by putting it in the stock market, and then using that to pay your estate tax or other things. It's only gonna be beneficial if it's earlier on. And I get so much resistance from people when I just point this out, they say, no.
Mike:Well, they said this, or or it's even like the insurance agents. When I do trainings, I'm a national coach. Mhmm. So I train financial advisers all over the country. I'm on the panels just to kind of share the contradictory opinion of things.
Mike:I just think, guys, you know how to use Excel. Right? Just do the math. Right. Just question if the thing you're being told is true or not.
Mike:And it really upsets them when they realize, oh, maybe it isn't as cracked up as I was told. But these are things you need to understand about life insurance. So the rule of thumb is that I've noticed, this is my anecdotal kind of result is, people that have life insurance as they enter into retirement, usually they keep it, but we restructure the policy to lower the cost of insurance. They've already paid into it, and we use it as best as we can. I have seen people where there's a higher death benefit, there's lower cash value, and they just get rid of it because they don't need a death benefit, because they've already saved enough.
Mike:They've amassed enough wealth. They don't need the death benefit anymore. So why would they keep paying, taking out their cash flow, when they could be doing other things with the money?
David:Right.
Mike:But it is such an individualized conversation. You've really gotta run the numbers. You've gotta look at it from not just the the cash value and the death benefit, but the other parts of your financial needs, your health care planning, the death benefits, the legacy planning, your estate planning, the tax implications, and so on. Understand what you're saying yes or no to. Many times, the solution you would not have even thought of because you didn't know the right questions to ask.
Mike:That's why you come in and see someone like us here at Kedric Wealth, is to not go to the person that's already sold you the policy, the person that's already made the commission. It's kinda like they may not want to spend the time diving the details. It's already been done. You want to work with someone that, frankly, you're paying them by the hour to give you the objective opinion, that's honest, that's forthright, and is very black and white, explaining the benefits and detriments of the various paths that you would proceed. That is key.
Mike:That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility.
Mike:This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date, go to www.yourwealthanalysis.com today to learn more and get started.