Listen as we discuss the industry, how to get a quote, term life vs whole life policy, and a big tip for getting the life insurance you want.
Hi this is Michael Carlin president of Henry and Horne wealth management with your manage the funds podcast today. We’re going to tackle life insurance and the interesting thing about life insurance is that so many people have it. Everyone thinks about it. Talk about it. But do you know how to buy life insurance. You know how to do it the right way. Have you ever wanted to learn a little bit about the industry in general and how it works. We’re gonna break it down hopefully in about 10 minutes or so in terms of what’s going on in the life insurance world and how to make you a better and more aware consumer of life insurance in general.
So as we dive in the first thing I want to talk about the big picture is the terms because there are so many different terms about life insurance in general. One in the most important is death benefit. Death benefit is the amount of money that you’ll receive in the unfortunate event that the insured passes away. So if I’m working with Mr. Smith and Mrs. Smith and we decide that we go through the whole process which we’ll talk more about that they need a million dollars worth of life insurance coverage that coverage is death benefit.
That death benefit is that million dollars is the amount that the surviving spouse will receive in the event that someone passes away that million dollars. That death benefit is the first and most important term that I’m going to want to make sure you know and understand very very quickly. The second is premium and the premium means well how much am I going to pay every year. It’s a super critical function obviously because from a cash flow perspective we want to pay the littlest amount possible and that is always the case with life insurance yet you’re going to find out that premium or the amount that you end up paying every year is going to change dramatically from policy type to policy type so cheap doesn’t always mean it’s what’s best cheap sometimes really just means it’s an inexpensive life insurance policy that may not be suitable for you and your family or your needs.
We have to make sure like any good medical diagnosis that you get from a doctor we’re gonna wanna have the same kind of quality diagnosis that goes into understanding how much life insurance you need. What’s the death benefit amount. How much the term or the duration of the policy which is actually the third term we’re going to the third word we’re going to need to define. We’re gonna want to make sure all the facets of your policy work really well for you and your family. So again there’s term term as well. How long does the policy last for.
It’s confusing because some policies there term policies and they’re telling you right upfront oh this policy is going to last for 10 years 20 years 30 years it’s some set period of time. Term policies are great for most not always for everyone because it covers you for certain a certain period of time. So let’s just say we know that between now and a certain point in 20 years time we’re going to need an insurance insurance coverage. We’ll talk a little bit more about some of those scenarios and what they might be. But if we’ve got a 20 year period of time we know we need insurance and a half a million dollars is the number that we come up with.
You can buy a 20 year term policy saying I’m going to get covered from now to 20 years from now I’m going to have this half a million dollars of coverage. And when that term expires when it’s in the 21st year the insurance is no longer there and you’re going to have the ability to get all the coverage you need from the window that you want it. One of the things that people don’t always tell you is that with term policies is that even after a term expires they’ll still let you renew.
This is kind of a little industry secret but it’s usually at an extraordinarily high rate. It’s a level rate. The term policy for a while you own it for a certain period time and then when that term expires the rates are significantly higher. But again term is the amount of years that the policy will last for a beneficiary you’ve got to choose somebody in the event you pass away who does it go to that’s your beneficiary and we’re going to go ahead and dive into how much life insurance do I need. When you’re doing the how to and you’re trying to figure out well geez what should I do with life insurance the first question we’ve got to answer is Well how much less do the how much and what for.
And there’s a variety of different reasons. There’s a variety of different personal situations. Let’s just say that you’re married and you want to leave a financial cushion for your spouse. You would look for a life insurance for an income replacement. We can make up a scenario. There’s a husband and a wife and they both make one hundred thousand each in this case. So if one of the spouses were to pass away you have a choice. Am I going to reduce my my standard of living. Because now I went down from two hundred thousand dollars of income to only one or am I going buy a life insurance policy to replace that lost income.
And for how long do I want to have that lost income replaced for. In that case creating a financial cushion for your surviving spouse. You can easily define a certain dollar amount to say Here’s exactly what we need and here’s exactly how long we need it. That’s a that’s a good case in point. It’s completely different if you’ve got kids little ones and think about it where you have a two year old and a newborn. And if something were to happen how are those kids going to get taken care of.
If if we lose a wage earner or if that wage earner is the primary wage earner how are we going to take care of those kids. So you and what we do is we go through when we have a lot of factors for how much child care cost is. And you do some scenarios to say well here’s how long it should go for. Again to again accumulate how much life insurance I need. There are so many other reasons to have life insurance coverage just other than for surviving spouse and replaced income that could be in it should be to pay off any and all debts I typically like to structure life insurance policies for clients where if there is a mortgage I like to make sure that mortgage is paid off with life insurance.
For me what I find is that when a set when when you’re dealing with a surviving spouse and they lose a spouse it’s such a tough situation emotionally to deal with. Even if you can improve the cash flow dramatically by eliminating a mortgage it’s one significantly reduced stress and anxiety point that can make the financial planning process so much easier so paying off any and all debts it could be student loans. It could be a mortgage. It could be credit cards but you’re going to want to have some kind of policy to make sure that slate is wiped clean and this is my opinion and that’s how I would structure it.
You can also have a life insurance policy for things for charitable reasons or other people to take care of. Brothers and sisters those kinds of things. Obviously there’s a whole other slew of life insurance which we can’t cover today which are employee employer related. We’ll get to that at some point maybe but not for today. Let’s just go big picture on what we’re how we do life insurance and how we how we get it done appropriately. So once you understood a little bit about what do I need the life insurance policy for you’re able to figure out well geez my kids are only going to be young for so long and then at that point while I don’t need a life insurance anymore.
If that’s the case and at some point I’m going to pay off these debts. Those are some reasons where you say well geez you know my in those scenarios I only need insurance for a set term period a certain number of years you may need policy coverage forever to take care of a surviving spouse to replace income. So when it comes time to get quotes you’re going to want to understand how much you need and how long you need it for.
We’re gonna go with term life because it’s the one that’s most heavily advertised on TV where they talk about all these cheap quotes a healthy young woman is able to get hundreds of thousands of dollars of coverage for five dollars a month. It’s always something spectacular. That’s term life it’s always a very set period of time so when it comes time to get quotes there is a lot of different places to get term life quotes. There’s some of me can do online you can. Anybody that sells life insurance can get these fairly easily what you want to make sure is when you’re getting a term life quote that you have a bunch of companies a bunch.
There are so many that offer term life you’re going to want to have 15 20 30 of them on one spreadsheet so that you can see who’s offering you the best term life quote. These companies they often rotate in who’s the best in who’s the cheapest if you want to get a whole life quote something that’s going to last you to age 100 because you’re in need for insurance isn’t going to go away. Now you need to work with an insurance agent. There may be places where you can get it online but in my in my experience you’re going to want to have an agent that’s going to help you walk through because now you’re starting to get to a whole different level of complex insurance policies that exist in different underlying investment vehicles that would and that operate very differently than term life because these things can grow and have cash value in them.
So policies can grow and have cash value. You’re going to want to make sure you understand the inner workings. And again it’s not always about the cheapest premiums so when you’re laying out even a term or a whole life policy you’re gonna want to. You can certainly look at both. One again which should cover you to age 101 for a certain period of time and you don’t always want to select the least one you want to make sure you have at matching your total needs. This is not about the cheapest premiums so the application process when you’re doing this process of life insurance is fairly straightforward.
You complete the application you schedule an exam and what we’re gonna want to make sure of is that when you’re scheduling an exam. You know make sure you are not going out and drinking heavily the night before you’re gonna want to make sure that you’re not around a lot of cigar smoke and cigarette smoke. You know the days leading up to it you’re gonna want to make sure that you’re also fasting the morning of because you’re gonna want to come up with a very accurate reading of your cholesterol you get an accurate reading of what your blood levels are and the process of underwriting takes some time.
It can be a few weeks. It could be a month. It just depends and also depends on what they find. The underwriters will look at all of your information from your driving record. They’re going to look at in some cases they’ll going to look at your credit rating. They’re going to look at the exam that they just took and how your what your blood looked like and they’re going to look through all the different doctors reports and say well what happened you know actually and there may even follow up so you know you went to see Dr. Smith and Dr. Smith said that you had something on your scan I had to get cut off.
Whatever happened there they’re going to want the complete picture of your total medical situation before they’re happy to provide you with a final answer. They’re going to look at things like family history. What’s interesting is that the way that technology has changed things is that it used to always be the basics where you needed a blood, urine, and in lots of cases an EKG in order to get a life insurance policy and that’s still true today but more and more we’re seeing that insurance companies are relying less on those initial exams and doing more due diligence on every piece of information they can get on you.
So you may not even have to take an exam in order to get life insurance. Going to look at what you’ve already got. So you’re going to again you’re going to then get your underwriting you’re going to find out what happened. Did the quote come in is what you were expected. You’re going to have this illustration that said Well jeez I thought my million dollars of term life was going to cost a thousand dollars a year and it came back fourteen hundred what happened in that case it was all just your standard plus you were a preferred minus you were and they could have other issues which you could in many cases in situations argue with fight and get an improved result.
But if you don’t get the result that you wanted this is a super trick for you and a big tip you’re going to want to make sure that you go to a number of carriers and have them compete for your business. Yes you can do that. Well just because you’re rated standard plus here doesn’t mean you’re not preferred minus over there doesn’t mean you’re not preferred somewhere else and it just depends on a lot of factors sometimes insurance companies are competing for business sometimes they want new business. Some will view your family history one way some of you in another way it’s just something that you should have and be prepared for to have multiple carrier shop no matter what policy or policy type you’re getting so that you can get the best premium.
This may be a reason why you would want to work with an agent. You could probably still do it on your own but get multiple quotes because you never know what they’re going to find. And once that’s done once you’ve gotten the right underwriting you’ve figured out the amount of insurance again you’ve figured out the term that you lengthen the duration of the insurance that you have to have. Go ahead pay the premium. You’re ready to go your life insurance policy is yours. So with that don’t forget to pay your premiums by the way because they will cancel you out. With that if you have any questions or would like more information certainly reach out to us reach out to us that manage the funds dot com as always this is Michael Crown president of Henry and wealth management thanks so much.
Take care and have a great day.
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