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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 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 go to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial advisor, a licensed insurance agent, and a tax professional. In other words, I could actually do your taxes.
Mike:And when it comes to financial topics on the show, pretty much talk about anything, and that's really important. We wanna be able to talk about anything. Now that said, please remember this is just a show. Everything you hear should be considered informational, as in not financial advice. I don't know you.
Mike:You don't know me. If you want personal financial advice, then request your wealth analysis from my team today, my team of fiduciaries. You can do that by going to www dot yourwealthanalysis.com. With me in the studio today is my esteemed colleague, mister David Fransen. David, thanks for being here today.
David:Good morning.
Mike:David's job, his mission is to be the voice of the people. He's gonna be reading off your questions, and I'm gonna do my best to answer them. You can send your questions in at any time by either texting them to 913-363-1234. That's 913-363-1234. Or email them to hey mike at how to retire on time.com.
Mike:Let's begin.
David:Hey Mike, Do you recommend term life insurance for newly retired individuals?
Mike:That's an interesting question. Term life insurance for and I see this every now and then, but term life insurance for newly retired individuals. So as with any decision, my first, second, and third question is why? Why do you want term life insurance? For some people, it's because they just they they like the idea that if they put in a a couple of bucks in and they were to die, there's a huge lump sum to the kids or to the surviving spouse.
Mike:And and if that's what you want, then let's make sure we call it what it is. It's not an investment. Yeah. I think most people understand it, but let's define it a little bit differently. So term life insurance, you pay a couple of bucks a month or whatever the rate is.
Mike:If you die, you get a death benefit. The greater the death benefit, the more you're gonna pay into the policy. There's no cash value associated with it. It's not an investment. It's just saying, basically, if you were to die during this period of time, there's a death benefit coming your way.
David:And that's
Mike:That's it.
David:Basically in a nutshell.
Mike:Typically, what I see is it's more appropriate for those in their twenties or thirties when they're married, when they have a kid. And if they were to die, it would create financial troubles for other people. If you have a lot of debt, you get term life insurance because you don't want that debt to be someone else's burden. At some point, and I don't think this is discussed enough, term life insurance could be turned into permanent life insurance whether that's whole life or universal life. I I am partial to universal life specifically indexed universal life because I found there's more growth potential over the longer term period of time.
Mike:You can adjust policies to lower the cost of insurance overall and you can just stop paying if you want you don't have to keep paying that's that's the beauty of permanent life insurance you can just stop paying when you want with term life insurance you stop paying the benefit goes away with permanent life insurance you stop paying there's still a cash value associated with it assuming that the policy was created correctly, assuming that it was funded correctly, assuming that it's being managed correctly. There's a lot of assumptions with it because life insurance may be one of the most complicated items or products when it comes to insurance. It's just it it just it's there's a lot.
David:Why is why is insurance so complicated? Or is that is that a whole other show?
Mike:Yeah. It could be a whole another show, but let's let's review it briefly. I think it's worth worth talking about. So first off, life insurance is just it's it's a risk mitigation. Insurance companies are gonna use their actuaries to predict probability so that the odds are in their favor.
Mike:They know that there will be a few people that will claim their policy. So that something will happen, and then they will claim the benefits of whatever they paid into, and they know that. But they also know the odds are in their favor, and that they'll probably make money overall. That's how insurance works. It's the pooling of many people together to then provide benefit to those who got unlucky.
Mike:It's not a casino situation because the risk is loss. I don't think people buy term life insurance hoping they will die.
David:No.
Mike:I don't think people buy permanent life insurance hoping they're going to die. Like, people don't buy accidental life insurance hoping that they're gonna get into an accident. People don't buy homeowners insurance hoping their house is gonna burn. Right. People don't buy car insurance hoping they're going to get an accident.
Mike:Right? So the loss is always I don't know if I can say always, but the loss is it's a negative situation that you inherently want to avoid. The complexities of calculating all of that are enormous. But with term life insurance, it's pretty straightforward. Are you going to die or are you not gonna die?
Mike:Then you get into annuities. Annuities are a little bit simpler. So if you do a single premium annuity and you want income, you're transferring longevity risk to an insurance company. They just need to make sure that you'll probably die faster than you drain the insurance company of of their capital because you're give you're basically paying insurance to give you your money back, and they just hope you die about when they're when you're expected to die so they don't lose out on a lot. They're taking some risk.
Mike:You're taking some risk. That's a pretty straightforward situation. Yeah. Well, when you start incorporating index performance into the growth, the cash value growth of an insurance product, it becomes more complicated. What's the index?
Mike:How is it credited? How do they structure the policies through fixed income and then options and derivatives and the other complicated instruments to provide that growth potential with principal protection? That was a lot of jargon right there. And I apologize for getting a little bit technical there. But I wanna emphasize that when you create a more complicated situation to potentially have more upside growth, they're gonna make sure they understand they're not over promising.
Mike:They're gonna do their best to understand that things are as cut and dry. It's almost like you need an attorney to read an insurance policy, and too often we glaze over that. And then when you get into life insurance. Let me explain life insurance a little bit here. And I've got 2 Kiplinger articles on this, by the way.
Mike:You can just type in Mike Decker Kiplinger, and you should pull up my my profile there. I write for Kiplinger frequently. And you can find my life insurance articles, because it is technical. With indexed universal life, which is what I'm going to talk about as the example, if you fund it all in 1 year, you're gonna MEC the policy. That's a a term called modified endowment clause, which basically means you don't have any tax benefits.
Mike:That sucks. If you fund it over a certain period of time, and it's the same payment over a certain period of time, then the cash value can grow tax free. It can distribute tax free. And then when you die, it passes to the kids potentially tax free as well. There's some estate planning issues potentially with that as well.
Mike:But do you see how there's there are tax issues with how the accounting is done, how it's being funded that are regulated by the IRS that must be adhered to? That complicates things. There are administrative costs. There's investment costs. There's portfolio costs within these index policies that have to be managed, and they're not doing it for free.
Mike:Insurance companies aren't charitable. Uh-huh. They're a business. Yep. They're in the business of transferring risk.
Mike:So they're gonna make sure they make their money. And so when if you fund it over a 10 year period of time, you need to understand those nuanced fees because it's not fee friendly for the 1st 10 years. So you have to understand the timeline of that. You have to understand how to break it down. You have to understand let's say you've funded over a 5 year period of time.
Mike:You have to understand that if you drop the death benefit of an IUL, for example, that the cost of insurance will go down, but you wouldn't know that if you didn't know to look for it. You wouldn't know that unless you knew that you could do that. And if you drop the death benefit down, there's less cost of insurance. If there's a less cost of insurance overall, the insurance company doesn't have as much risk. The insurance company has less risk.
Mike:They're gonna charge you less. If they charge you less, then you've got more growth potential from the cash standpoint. And then you've got the death benefit component, which is basically term life insurance baked into this cash vehicle of life. Do you see how complicated it gets? Yeah.
Mike:The more features and the more things you try to do to something, the more complicated it gets. A stock is a stock. You're buying partial ownership of a company, and you go up or down with the perceived value of that company. With insurance, because it is the transference of risk, they can put all sorts of features and alleged benefits and and all sorts of cool stuff in there. But it can turn into this Frankenstein like thing that just can go over people's head.
Mike:And, unfortunately, a lot of people are just told, hey. No. Everyone does this. Here's how it works, and they gloss over all these details, then pay more in fees than they realize, not earning as much in the growth, and so on. Is life insurance bad?
Mike:No. If you need a death benefit, that's the primary objective. If you want some potential tax efficiency strategies, then that might make sense as well. If you have time to fund it, then it might make sense as well. These are the the things that need to be addressed.
Mike:So do you recommend term life insurance for newly retired individuals? Not typically. And we've kind of meandered through our conversation today, gone down a few rabbit holes. But here's my opinion. How can you afford to retire if you don't have enough to live off of?
Mike:And if you have enough to live off of, then what's the risk of dying at that point? You're self sufficient. If you want it, for whatever reason, I know some people had term life insurance going until 70 years old in case that one were to pass for Social Security purposes or survival benefits. They wanted to bridge a gap. It was something they did to live within their emotional limits.
Mike:It wasn't economic. It was an emotional thing for spousal service. I I get that. Yeah. They wanted to transfer risk, and they were okay paying the premiums.
Mike:But usually, what I see for those entering retirement is they're getting rid of term life insurance policies. And if they still want the death benefit for surviving spouse or for the kids, they're transitioning towards towards permanent life insurance like index universal life. And that's if they even want it. Do you need life insurance for a retirement plan to be successful? No.
Mike:No. Absolutely not. The idea that you need something to be successful, I think, is a farce. It sounds like a sales pitch to me. It's just do you want the feature?
Mike:Do the benefits make sense? And are you okay with the detriments? That's how it is. So Makes sense. I mean, it's fine if you want term life insurance.
Mike:There may be other options out there you don't know even exist. There may be different ways you could structure other versions of life insurance, or you may realize that you don't need it at all. If someone can offer you investment advice, work with you on a stock, bond, fund, whatever portfolio, they're they're able to work in securities, they can sell you insurance products, and they can do your taxes, it's probably the person you wanna be talking to. Because that's a person that can take it from a holistic and comprehensive standpoint to figure out what is right for you. It's very difficult to solve a complex problem with limited abilities.
Mike:It's like trying to build a house with just a hammer and some nails. How are you gonna cut the wood?
David:Right.
Mike:I mean Yeah.
David:You gotta have your your, your workers. You gotta have your, your plumber. You gotta have your, you you know, your roofer. These are all different, skill sets that go into
Mike:If you want a comfortable house. Yeah. I mean, I guess, technically, you don't need plumbing and electricity in a house to to live in it, but it would be much Less comfortable.
David:I agree with you. Yes.
Mike:And if you if you want life insurance, or even if you don't want life insurance, but if you wanna have a detailed conversation making informed decisions with someone that's gonna present a feature, and then discuss the benefits and detriments of that feature and really break down the options that are available to you, then request Your Wealth Analysis today. Just go to www.yourwealthanalysis.com. You request that. It's 10 questions and then a 30 minute call with me, and then we'll proceed. Doesn't cost you a dime.
Mike:Just a little bit of your time to really open up and explore your lifestyle and legacy potential. It can be a remarkable experience. A lot of fun. Usually, a lot of laughs are shared. It's a it's a good time.
Mike:Go to www.yourwealthanalysis.com or text keyword analysis to 913-363-1234. Again, that's keyword analysis to 913-363-1234. Let's explore what could be. 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.
Mike: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. This is not your ordinary financial analysis.
David:Learn more about Your Wealth Analysis and what
Mike: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.