How To Gain Financial Peace of Mind For Those You Love (#9)

Host Josh Nelson explains what he means by financial peace of mind. What it actually is and the consequences could be for those in your family without it. He helps with knowing how to be adequately prepared if something happened that would leave your loved ones in a financial lurch.

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Transcript

The opinions voiced in this episode of the wiser financial advisor with host Josh Nelson are for general information only and not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you, consult with your attorney, accountant, financial or tax advisor prior to investing. Investment advisory services offered through CWM LLC, an SEC registered investment advisor.

 Hi, everyone. Welcome to the wiser financial advisor show with Josh Nelson, where we get real, we get honest and we get clear about the financial world and your money. This is Josh Nelson, a certified financial planner and founder and CEO of Keystone Financial Services. We love feedback and you’re invited to pass it on to me directly at josh@keystonefinancial.com . Also, please stay plugged in with us. Get updates on episodes and help us promote the podcast by subscribing to us at Apple podcasts, Spotify, or your favorite podcast service. Let the financial fun begin.

 Today we're going to talk about death insurance, and you might say, “Death insurance, really? I've never heard of that before. What is that?”

 Exactly. So I'm being a little bit coy here. There actually isn't technically something called death insurance in the insurance world, but there is life insurance. And I think whoever it was that originally came up with the term life insurance was pretty smart because it sounds better, right, to tell somebody to get life insurance rather than death insurance. But the reality is that when we buy life insurance, what are we buying? We're buying insurance to pay out if we die. So it really is a form of death insurance. 

 If you’ve listened to me up till now, you know that I talk about different financial buckets that I advise putting different financial collections of stuff into. One of those is the protection bucket, which is the number one bucket I talk about, a bucket that holds things that are designed to protect your financial life. An important part of that bucket is insurance. Insurance policies protect us from losses that either ourselves or maybe members of our family would not be able to absorb very well. It’s  a way to keep our financial health if something devastating were to happen. That's why we have things like medical insurance and car insurance and house insurance, which they call homeowners insurance. (They used to call it fire insurance but as part of good marketing the name has been changed.) 

 The reality is life insurance is a big, big part of protecting, not really yourself, because if something happens to you, you're not here. What you’re buying is the knowledge that “Hey, I've protected my family. I've got things in place.” You’re protecting your family, the people that depend on you for income.

 There is a strange concept of human life value. In other words, there's a financial value on each of our lives, if we're producing income. And I think most of us are pulling in money in some way—even if you're retired or drawing social security, there's an income stream coming in. And if anybody else on the planet is depending on that income, then it's important to take a look at what would be the impact on the people that trust you, the people you’re taking care of. Would they still be okay if something were to happen to you right now? And I say right now, because none of us know how many days we have left. 

 Many of us have a vision that we're probably gonna live a long, long time and live to be very old. But the reality is that none of us know. I'm 45 years old right now and in really good health. I exercise and, you know, try to watch my diet and things like that. Checkups are all good. But at the end of the day, we don't know. Something crazy could happen. And I want to have the security in my mind of knowing that my family is taken care of. I also want them to know that if something were to happen to Josh—to my dad or my husband right now, they will be okay financially. 

 So let's talk about life insurance as far as how much do you need. And before we get to that, let’s go over the two different types of life insurance. The first one is term life insurance which is temporary.

 Term life insurance typically just lasts for a certain number of years and ends when the buyer hits a certain age (e.g. 80), at which point there will often be some continuation options or conversion options if you live longer. Most often, people buy term life insurance because they feel like they need some type of a death payout if something occurs to take them before the age at which their policy expires. If something were to happen to them during the next 10 years, 20 years, 30 years, or whatever number of years that term has on it, there’s an agreement in place with the insurance company that they will pay out. As long as premiums are paid along the way, and the  policy isn’t canceled, they will pay out a certain lump sum to your heirs upon your death. 

 The second type of life insurance is more permanent and includes policies like whole life, universal life variable, universal life, variable life. There are all kinds of different names for it, but permanent insurance is insurance that you plan on having for the rest of your life. That's why the original policies were called whole life policies, because you expected to keep it for your whole life, and it will pay a death benefit out someday when you pass away. 

 I am a big fan of term insurance. I have policies of both types myself personally, full disclosure, but I think in most cases, term insurance makes the most sense. It's typically the most cost-effective because when it's a whole life policy, then the insurance company knows they're going to have to pay out a death benefit at some point, even if it's many, many years down the road, because everybody dies eventually. However, if they're just on the hook for the next 10 years, 15 years, 20, they can charge you a lot less because they are making a bet after they go through their underwriting process. They're making the bet that, hey, things are pretty safe for us. We don't think this person is going to die over the next 10, 15, 20 years. So they can charge you a lot less.

 Okay, so how much do you need for a death benefit? There are two different considerations that I look at: immediate needs and ongoing needs. 

 Sometimes there aren’t any ongoing needs. Yes, it's possible that only some immediate needs will need to be taken care of. And of course we could brainstorm some of those, but the things that probably pop into your mind are things like funeral expenses or paying off some debt, or maybe it's funding a college account for kids, things like that. So we'd want to add those things together and come up with a dollar amount for immediate needs. Oftentimes people only think about just what needs to be covered close to immediately. They sometimes forget about that second piece, that ongoing piece, which is that right now, in my situation, I've got a family that depends on my income and they will continue to need it on an ongoing basis. If that’s the case, there's a larger chunk of money that would need to be paid out to be able to replace either all or part of my income or anybody's income on an ongoing basis. How do we figure that out? 

 Let's say we figured out the stuff that needs to be taken care of right away. Maybe somebody adds up and says, well, I want to pay off the mortgage and fund some college accounts and get some money into the bank for an emergency fund and pay funeral expenses. So maybe they come up with a few hundred thousand dollars there that would need to be paid out. Now, in some situations they might say, and of course we should do some math, right? But I find that way too many people wing this one. So this is something you could sit down with your certified financial planner to figure out. 

 Some people say, “You know what, if all those things are covered, all those immediate needs and debt paid off and so forth, maybe my spouse or other loved ones would have everything they need. They really wouldn't need any ongoing income.” So the second piece would be to ask how much money we would need to have paid out to replace income from the person who has passed on, either for a portion of time or maybe more permanently. You're taking a look at well, over what period of time? Do I need to replace somebody's income for five years, three years, 10 years? Whatever it might be. We do some simple math and figure out what those needs look like. I could do a little bit more complicated math and figure in some costs, some adjustments, things like that, but more or less that part is fairly easy. 

 But what about if somebody says, “You know what, there's a certain income stream that really needs to be there on an ongoing basis. And by ongoing, I mean like forever.”  I’m using their words now. Maybe it's a spousal situation where we’d like to put that person in the position to have their retirement accounts funded. In other words, they'd have enough in investments to make it through the rest of their life living off of that income. Some situations it may not be replacing a hundred percent of somebody's  income. Let's look at a simple example.

 Let's say that somebody looked at it and said, “Well, my initial stuff, the immediate needs call for $300,000 worth of death benefit. But then we really need an ongoing income stream of $50,000 a year, to replace or supplement income for ongoing expenses so the surviving spouse could have the same kind of lifestyle they were having before.” So $50,000 maybe supplements other income that the surviving spouse will bring in if they work or get other benefits like social security or something like that. How do we figure out simply what will be needed? Here’s a simple example:

 First off, generally speaking we like it when withdrawal rates of people's portfolios do not exceed 5%. We prefer 4% even, but we'll push the limit here and say 5%. To generate $50,000 a year,  we would need about a million dollars paid out. We would put that million dollars into a diversified portfolio that was invested in such a way as to generate that 4% to 5% range. The math tells us that if someone needs a hundred thousand dollars a year, we need a $2 million payout and so forth. 

 So to figure out what amount of insurance to plan for, you add up those pieces. Again, what needs to be paid out right away? Look at what is going to be a temporary need and what is going to be a permanent need. If it's a permanent need, we know that we need a lot larger dollar amount. 

 Something I find is that when people start seeing these dollar amounts and thinking, wow, that's a lot of life insurance, they start to say things like,  “I don't know if I want to make my surviving spouse or kids rich. I don't want to put my kids in a position where, you know, it's just way too much money and they end up ruining their lives over it.” Well, I can tell you that I've been doing this work for 21 years and I’ve seen some sad situations, certainly, especially when somebody passes away at a younger age. I have yet to sit in my office with a widow and go through the finances and say, “Wow, this is way more money than we need.”

 It's usually the exact opposite. Usually we're trying to figure out,  “How do we make this work?” Because it's usually needing to be stretched. So I throw that out to you just because it's important to think about not only the different math aspects here, but also the emotional aspects. Another consideration is that things always cost more than we think. You know, there could be home improvements or repairs on a vehicle or replacing a furnace, anything like that. Things are always more expensive than we project. So, I would encourage you to go higher. If you're trying to figure out, do I go this amount or this, go with the higher amount simply because more than likely, it's not going to go as far as you think, and it puts your survivors in a lot better position.

 What this means is that for many of us, myself included, we're probably talking about a lot of life insurance. If you're younger, you're probably talking about even more life insurance, because you don't have as many financial resources probably built up in your retirement accounts, your investments, things like that. Of course, those accounts play into this because if you’ve got a big portfolio and all your debts paid off and all the kids are out of the house, you might actually look at your situation and decide you may not need as much life insurance. In fact, in some cases, we sit with folks to consider this question and it turns out, gosh, we don't know if life insurance is needed anymore. And we run the math and say, well, we think that you're all right.

 However, even if you don't absolutely need it, in some cases people keep it anyway. They might keep a life insurance policy just because it makes their spouse feel better. Or maybe it makes them feel better, even if it isn’t indicated by the math. 

 And so it's important to think through all this, as far as your protection bucket and what could go wrong. Then  always round up, always do a little bit more than what you think might be called for, because money never goes just as far as we think that it's going to go. 

 We’re talking about preparing for the future. You might have life insurance available through work. You might be given the opportunity to buy term life insurance or  permanent life insurance through your employer.

 Regarding the cost,  it's going to highly depend on how old you are and what kind of health you're in because almost every life insurance policy is going to require underwriting. If you're young, if you're healthy, you should be able to get a lot more life insurance for a small premium. One principle that financial planners have is that you never want to risk a lot for a little. And I can tell you that most of the time we run quotes on millions of dollars of term life insurance. Usually it comes out to be pretty cheap, a few hundred bucks a month typically. For somebody who's really young, you might even be paying less than that. It just depends on the situation and how you're buying the policy. We can certainly examine that with you, but this is not an area to skimp.

 I realize I've kind of been coming down hard on this, but I'm the one who has sat with widows before in a lot of sad situations. To repeat, in most, we're sitting there trying to figure out how to stretch the resources we've got. How do we make this work? Because it's just not looking like it's going to be enough. 

 So I'm going to leave you with that. I know this is not the most uplifting episode in the world, but nonetheless, some of these protection bucket things are a financial foundation that we need to address to make sure that the base of that financial pyramid is really, really solid before we get into other topics like investing.

 Investing is more exciting, right? More growth oriented. We’ll get there, I promise. 

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 The opinions voiced in this episode of the Wiser Financial Advisor with host Josh Nelson are for general information only and not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you, consult with your attorney, accountant, financial or tax advisor. Investment advisory services offered through CWM LLC, an SEC registered investment advisor