Hosted By: Wyatt Yates
Money Myth: Everybody Needs Life Insurance
In this episode, I discuss life insurance. What is the purpose of life insurance? Do you need it? What type of life insurance do you need? How much life insurance should you have? Listen to find out.
Wyatt Yates Host 00:00 Money doesn't have to be complicated. You can achieve financial independence. This podcast gets to the truth behind the money mess you hear from your grandma, your broke uncle, the latest social media influencers and the so-called money experts. Welcome to Money Myths with your host, wyatt Yates. 00:24 This week's myth that we're covering is everybody needs life insurance, and we've all heard this myth and we've probably heard it from the companies that sell the product or the people that sell the product. So let's try to look at what insurance is, and particularly what life insurance is, who really does need it. And then, how much do you need if you need it, and what policy or type of product do you need, because there's a variety of options when it comes to getting life insurance. So let's look at it Now. Life insurance is one area of insurance that is very confusing for a lot of people because there's a lot of different options out there. Whereas you understand your auto insurance or your homeowner's insurance, it's very simple, but life insurance over the years has evolved and there's tons of different options and it can be really confusing for people. So first, I think you have to step back and understand what insurance really is, and that will provide a lot of clarity on what when you're looking at life insurance. So insurance is where you're going to pay a monthly fee and they call it a premium to protect you from the risk of financial loss. It is risk mitigation I pay a fee to have the protection if something happened, that the financial loss is now the responsibility of the insurance company, in terms of them paying me out a benefit that I can then use those dollars to offset that financial loss. So you are protecting yourself from financial loss. That is, in the simplest terms, what insurance is, and the insurance companies are willing to accept that risk in exchange for a premium that you pay them. And that's what insurance is, and we've gotten away from it in life insurance. We've allowed the life insurance companies and the people that sell this product to muddy the waters and make us forget what insurance really is for and the purpose of insurance, which is to mitigate risk of financial loss. Now where you see this get muddled as far as not related to the true reason, you have insurance for the risk of financial losses in the different types of policies that are offered with life insurance. So let's look at what types of life insurance policies there are. 03:14 There's two main categories that policies will fall under. The first one is term life insurance. With term life insurance the policy lasts for a specific number of years, however many years you lay out when you buy the policy. So it could be five years, ten, twenty, thirty years, but it covers a specific set number of years. So if you do not die within that time frame of the policy, your policy expires and there's no payout and you don't have any type of benefit. So say, you get a twenty year policy but you don't die until your twenty-five after you get the policy. The twenty year policy would have expired with no payout and if you didn't get another policy you would die without any benefit. 04:04 The second main category with life insurance is a permanent life insurance policy and that policy differs and it will last your entire life and it usually includes a cash value component which you can withdraw or borrow against when you're still alive. It's usually a very minimal amount and there's fees associated if you want to borrow against it, but the policy will last your whole life. Now that does not mean the premiums are always gonna be the same, so that will depend on what type of policy you have. But examples of permanent life insurance that you may hear from an insurance agent, somebody who sells this is whole life insurance, universal life insurance or variable life insurance. Those are the three main ones. So, in addition to a payout or a death benefit, a lot of your permanent life insurance policies have this cash value component or have an investment component built into the policy, and this is where we get away from the whole. What's the purpose of insurance? You don't have a cash value on any other insurance part. You don't have a cash value on your auto insurance or your homeowner's insurance or your renter's insurance. Those policies are set up specifically for to protect you for financial loss, for risk mitigation. But we've muddied the waters with life insurance in that we have these policies now that have all these other benefits outside of the true purpose of what insurance is as far as protecting for financial loss. So we add in stuff with these permanent life insurance policies that muddy the waters can make it difficult for people to understand what do they need. 05:58 So a term life insurance policy is typically gonna be your cheapest, most affordable option. When it comes to what are you paying monthly in premiums, you will want a level term. If you do a term life insurance policy, a level term is gonna mean the premium stays the same every month over the whole length of the policy. You do not want a variable renewal policy where basically the premiums can go up every year and the policy is renewing each year and then your premiums are increasing. You wanna make sure you have a level term policy if you're doing term life insurance, because then your premiums stay the same the length of the policy. And obviously with a term policy one of your risks is you get a health condition during that term that maybe makes you uninsurable in the future and then that term expires and you can't get insurance afterwards. So that is one risk with term life insurance If your health changes to where you're uninsurable and the policy expires and you can't get reinsured. So that's where permanent life insurance, where it's lost your entire life, has a benefit because you don't have that risk. 07:26 But where permanent life insurance policies falter is they. A lot of them go away from the original purpose of insurance by trying to add in this cash value, add in this investment component and guess what? It's a lot more expensive than if you just did the investing or save cash separately from the policy. There's levels of fees and stuff, so it's more expensive than if you did that, and that's it gets away from the purpose of insurance and, as a result, your permanent life insurance policies are gonna be a lot more expensive than a term life policy. They're more expensive because they have these investment and cash value components built in and that's an additional cost to the insurer so they have to be able to recoup that. And for many of these policies there are some that the premiums don't increase as you age, but for many of them the premiums are gonna increase as you age because your risk of death increases, so it's you're not locking in the rate like you would on a level term policy. So those are the two main categories when it comes to life insurance. You have your term life insurance, which is gonna be your cheaper policy in terms of premiums, but the disadvantage is it will expire after a certain number of years, whatever years you have. Permanent life insurance policy is gonna be a lot more expensive, but it can last your entire life. But it can increase as you age in terms of what you're gonna have to pay. 09:08 And a lot of the permanent life insurance policies get away from the purpose of insurance, which is protecting you from a risk of financial loss. But, depending on your situation, a term policy may make sense or a permanent life policy may make sense or no policy may make sense. So let's look at who needs life insurance. So we go back to what's the purpose of insurance, and insurance is to protect you from the risk of financial loss. So who needs life insurance? Someone that has a risk of financial loss in the event that that person dies. So who is at risk of financial loss in the event of death? 09:53 There's really two categories here. The first one, which most people will fall under, but not everyone, is someone who provides an economic benefit that has people that depend on them for that benefit. So this is a husband and wife that maybe have dependent children or maybe they don't, but they depend on each other financially. So if one spouse were to pass away, there would be a financial loss for the surviving spouse, and that's where you would want to have that protection. If you depend on your spouse financially, whether it be the income they're providing with their job or career, or maybe they're a stay-at-home parent that provides an economic benefit because you don't have to pay for childcare Either case, if you have people that depend on you in the economic benefit you provide, you need to protect that benefit in the event of death and have life insurance. 11:09 If no one depends on you for your income or the economic benefit you provide, you don't need life insurance. Unless you fall under this category someone who has a high net worth, so high enough that their estate is going to be subject to estate taxes. So you got to think 20 million plus net worth, their estate is going to be subject to estate taxes. Life insurance can be a very good estate planning vehicle in this case to provide liquidity so the estate can handle paying the estate taxes, so the errors of your estate aren't forced to sell assets to get liquidity to pay the estate taxes. So if you have a high net worth and maybe you don't have anybody that's depending on you anymore financially but your estate's going to be subject to estate taxes, that's when a life insurance policy can be a very good vehicle to provide liquidity to the estate. 12:10 And in this scenario, that's when a more permanent life insurance type policy makes sense, because if you have a very high valued estate that's going to have estate taxes, you want to make sure if you get an illness or a health condition that makes you uninsurable in the future, that you still have this policy in place. So that's when a permanent life insurance policy can make a lot of sense for your high net worth individuals. So those are really the two categories of people that need this insurance, because we are protecting you from the risk of financial loss. Your dependents aren't going to have a financial loss in the event that you pass away, because you have this life insurance policy that's going to replace your income or have the liquidity to handle estate taxes if you're a high net worth person. So one category of people that don't fall under either one of those categories are your children, which insurance agents insurance companies love to sell the fact that it's the best time to get life insurance on your kids when they're young, because that's the cheapest. 13:26 But there's no need because your kids aren't providing an economic benefit and they don't have people that rely on that economic benefit because they don't have an economic benefit. They are consumers, they're not providers yet and your kids aren't meant to provide for you. So, even if you have the rarity of like a celebrity kid, they aren't meant to provide for their parents. You are their parents, you provide for them. So I would even make the argument. Even if your kids making millions on TV, you don't need life insurance on them because the purpose of your children is not to provide them financial benefit to you. You do not need life insurance on your children because they are not providing an economic benefit to any dependents. They do not have anybody that is relying on their income because they don't have dependents yet. 14:26 But you may need money if you don't have the cash. If, god forbid, something happened to one of your children and you had to have a funeral, you may need some type of coverage to pay for those funeral services. Now there's two ways you do that, and neither one of them requires you to have a separate policy. The first one is you have the cash already because you're managing your money correctly and you don't need to have the separate policy. The other way is you can get a writer on your policy that covers your kids in the event something would happen to one of your children, and a lot of times these writers on your policy are already built in to the premium, so there's actually no change in premium. Sometimes they may be a small fee. You have to pay for the writer and it can depend whether it's on the front end or the back end, it depends on the policy. 15:30 But you can get a writer for your children on your policies and that's the route you should go. You don't need a separate policy for them. You don't have auto insurance when you don't have a car. You don't pay for homeowners insurance if you don't have a home, because there's no financial loss risk and there's no risk mitigation needed there. And the same goes with your children. And it may even be 30 plus years before your kids have people that depend on them financially. So if you have a policy on your kids, you're paying. You could be paying in 30 years before you really need it. So you're making 30 years of payments on something you don't need. So don't let an insurance agent convince you that it's necessary, because it makes absolutely no sense to pay on something you don't need for years before it may be needed. 16:26 The other type of person that may not need life insurance that doesn't fall under these categories is an adult that doesn't have anybody that depends on them financially. Maybe your kids moved out, maybe you never married and your estate is under 20 million. You probably don't need life insurance if somebody doesn't depend on you, there's no risk of financial loss. So let's summarize this and get to our action steps. So insurance is to protect you from risk of a financial loss and, in the case of life insurance, it's to protect the people that are depending on you, on whether it's the financial benefit you provide or the economic benefit in relation to a stay at home parent. So you pay a fee monthly to protect you from this risk of financial loss in terms of a death benefit or payout, and insurance should stay in its own lane. Insurance is insurance. 17:31 Don't get it muddled and confused as far as investing or a way to save cash, because you are then going away from the purpose of insurance and, as a result, it's more costly. You can save cash and invest money in different investments a whole lot cheaper outside of an insurance product than you can inside of an insurance product, and that's why, for most people, a term life policy makes sense. You ensure the period that you have people depending on you, so, whether that be 20 or 30 years, that you may need it because you have children and you wanna make sure they're taken care of until they reach adulthood, then ensure a term life policy makes a lot of sense, whereas a permanent life type policy so like a whole life, a universal life or a variable life policy those are gonna make a lot of sense if you are a very high net worth individual thing 20, 30, 40, 50 plus million where your state's gonna have taxes and you need to have liquidity for your estate to pay those estate taxes, and that's where those types of policies can make a lot of sense. And if you don't have dependents, if you're a child or you don't have anybody that's depending on you and you don't have a high net worth, you really don't need the extra cost of life insurance. You are ensuring something that has really no risk of financial loss because you don't have people that depend on you for finances. 19:20 So, say, you fall in the category where you need life insurance. You have children or people that are depending on your income or economic benefit that you provide, so you need life insurance. So for the action step, if you don't have any, you need to look into getting some as soon as possible, because you have people that are depending on you and, in the most simplest terms, is completely irresponsible for you to not have it. So you can go online, you can talk to an agent, but what you probably fall under. Unless you have $20 million net worth, a simple level term life insurance policy for 20 or 30 years is probably sufficient for what you need. So if you don't have insurance, you fall under the category of somebody that needs it. You need to go out and get some. Or you may be somebody that already has insurance, but maybe it's been a while since you looked at your life insurance and whether or not you have enough because, say, your income's gone up and your lifestyle's gone up to reflect that increase in income and it's been 10, 15 years since you last got the policy and you may be underinsured. So you need to look at it, your life insurance policy or policies, because you can have multiple in whether you're properly insured. 20:46 So how do you figure out how much life insurance you need? There's a few different ways you can do it. You can say you want enough to cover paying off all the debts of the household and providing income and also maybe paying off the mortgage and being able to pay for the education of your kids. So that's called the dime method debt, income replacement, mortgage and education. Or you can use a simple calculation of maybe 10 times the economic benefit you provide or your annual income. 10 times that or 12 times that number is usually enough to cover everything. That's in kind of the dime method as well. So those are two ways you can kind of calculate what your need is, and it's gonna depend on your estate and your finances of your household. But you can either use like 10 or 12 times your annual income or economic benefits. So if you're a stay at home parent, maybe it's you need anywhere from like a 250 to $500,000 policy. It can depend on where you live, on what childcare costs. So it's either 10 or 12 times your income. Or use the dime method and say we're going to pay off all our debt, want to be able to pay off all the debts, provide income and pay off the mortgage and be able to cover the kids education. So that's your action step. 22:16 If you're somebody that falls under the category of needing life insurance or you haven't reviewed your policy in a long time, you need to look at what you have and talk to an agent to go through making sure you have adequate coverage and the majority of people that's going to be a level term policy. Do not fall for the sales pitch of adding this. Cash savings and adding this investment option to your policy and having a permanent life policy unless you really are a very high net worth individual is really the only time those types of policies can make sense. So don't fall for that. Keep insurance what insurance is meant for, and that is to protect you from the risk of financial loss and, in terms of life insurance, that is to protect people that depend on you from the loss of your economic benefit or your income when you pass away. So keep insurance insurance. Don't muddle it with investing or saving. You. Do that separately. It will be a lot cheaper and it's going to save you a lot of money and premiums and your investments can actually grow a lot more than what they can inside of insurance policy when you do it outside. So go and review your policies. Make sure you get this in order. It is the most loving thing you can do for your dependents to make sure they are taken care of if something were to happen to you. 23:53 Thanks for listening. Want to achieve financial independence? Go to ruggedfinancialcom, where you can download my free PDF of the 12 Things to Do to Win With Money, and you can also sign up for my weekly money tips emails where I cover the same tips and tricks and advice I walk all my clients through so you can begin your journey to financial independence. Thank you for watching and listening to this episode of the Money Myths podcast. Please do me a favor and, if you found this episode interesting, subscribe to the podcast so you can make sure you get all the future episodes. 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