I wouldn’t call Life Insurance an “underrated” financial tool, but I would call it misundastood (to quote P!nk). When I first got into the biz of financial planning, I’d heard heaps of rules about life insurance: how much you should buy, what type you should have, and most importantly: Who To Avoid When Buying Life Insurance.
Specifically, I heard this: avoid life insurance salesmen.
To many people, the above phrase translates to: avoid anyone with a clue about how insurance works because you don’t know who to trust.
Imagine my surprise when I began studying life insurance during my quest to become a licensed advisor. There were tons of policy types AND uses for term, universal and whole life insurance policies. I was amazed at how versatile a weapon both term and whole life insurance could be: among a gazillion other things, you could use it to cover income streams, save for your kid’s college or protect an estate.
3 Cases of Mistaken Identity With Life Insurance
Here are some of my favorite misconceptions.
1) The only good policy type is term life insurance. If term is the only good one, why do universal and whole life insurance even exist? Are there that many rip off artists out there to support these huge insurance companies? I doubt it. Here’s another theory:
While I’ll wholeheartedly agree that the other types (whole life and universal) are grossly oversold by people who aren’t paying attention to their client’s best interest, these products were each created for some good reasons.
Whole life insurance, for example…how great is this: you pay your premium and you know it’ll be there FOREVER. No worrying about whether you’ll still need it when your term runs out.
…and how about universal life? It lasts forever, but you can change the death benefit to match your lifestyle. Check this out:
Uncle Joe’s Universal Life Story
Sally, our horse racing fan from the last story, has three boys: Larry, Curly and Morris (she nicknames him, surprisingly, “Moe” for short). As each boy leaves the house at 18 to become a real-life superhero, Sally now needs less insurance and lays off the vodka a little more. She calls her insurance company and sinks the death benefit down to reflect her new need. Now she can pay less money each week OR have more of her premium go into the cash value (money inside the policy) so that she can stop paying for the policy early and enjoy more retirement dollars without a life insurance payment. That’ll give her more money for the ponies. Win!
Cool, huh? I can hear the detractors beating on my door, pitchforks in hand. “You’re going to pay through the nose for those universal and whole life insurance benefits.” Duh. Let’s see a show of hands of people who think insurance companies give stuff away for free. Anyone? Here’s a little secret: any time insurance companies agree to sell you a guarantee you’re gonna pay for it.
2) You only need Life Insurance to cover income needs. Whole, Universal, and Term Life insurances are valuable tools for a variety of reasons:
Burial costs: If your money is in places that are locked up you might not be able to cover some of the costs quickly. Life insurance money can often be ready within a matter of a few days.
Liquidity: Some of those locked up places, like rental homes, aren’t liquid immediately. Life insurance can buy flexibility.
Business concerns: How many spouses of business owners are qualified to run the biz after the owner dies? In most cases, they aren’t. With the proper legal documents and a life insurance policy, the spouse is bought out and a capable underling, associate or competitor takes over the business. (term life insurance isn’t appropriate for this)
Estate needs: For large estates, there may be estate taxes due. These can be higher than 50% of the value of the estate. Ouch! Life insurance is an inexpensive way to cover these costs. (term life insurance isn’t appropriate for this)
3) Buy life insurance when you’re young and don’t need it because it’s cheap. Huh? Lets say there’s a special on Spam and it’s only $.05 per can. Are you going to buy 100 of them? No. Why not? Because you don’t need them. Apply that same principle to life insurance, whether it’s permanent or term life insurance . While there are a myriad of reasons why you might need insurance, don’t get caught in the “it’s cheap” trap.
OG and I want to thank Jeff Rose from Good Financial Cents for organizing today’s Life Insurance Movement. You can learn more about the movement on our latest 2 Guys & Your Money podcast episode, #007.