Life Insurance is a very important aspect of your financial future. But it can be very confusing. Today, Richard Oring of New Century Financial Group breaks down everything you need to know about Life Insurance.
Next, Rich breaks down the pros and cons of different types of life insurance, including:
Finally, we talk about the important aspects of selecting life insurance, medical underwriting, and the importance of being educated before making a decision.
For help with this or any aspect of your financial future, reach out to Rich at New Century Financial Group:
Phone: (609) 924-2049, extension 126
Website: www.ncfg.com
Email: roring@ncfg.com
Life Insurance is a very important aspect of your financial future. But it can be very confusing. Today, Richard Oring of New Century Financial Group breaks down everything you need to know about Life Insurance.
Next, Rich breaks down the pros and cons of different types of life insurance, including:
Finally, we talk about the important aspects of selecting life insurance, medical underwriting, and the importance of being educated before making a decision.
For help with this or any aspect of your financial future, reach out to Rich at New Century Financial Group:
Phone: (609) 924-2049, extension 126
Website: www.ncfg.com
Email: roring@ncfg.com
Jag:
Welcome back to Financial Matters with Richard Oring. I am Jon Gay joined, again, by Richard Oring from New Century Financial Group. Always good to be with you, Rich.
Richard:
Jag, it's always good to be here. It's good to hear from you. It's been a while.
Jag:
It has been always good to get into things with you, and catch up. How you've been? What's been going on with you?
Richard:
Right when I thought life was getting back to normal... We took two family vacations over the last month or so, to some traveling, and then we got back. As soon as we get back, you hear about this Delta variant and masks and school notices, and all these states are changing the rules. It's like, oh man, we finally got back to traveling, it was nice to see family members we haven't seen for a while. Now we're talking about lockdown and maybe not traveling as much, and being a little more careful.
Richard:
I only have one more kid who needs to be vaccinated, he's 11. We're waiting for that approval, then he'll get vaccinated.
Jag:
Glad to hear it. I went to the Podcast Movement convention in Nashville a couple of weeks ago, and I was a little bit nervous about traveling myself, but I took a COVID test before I left. I'm fully vaccinated. I took a COVID test when I came back, all is good. It was just nice to see people in person and get some semblance of normalcy, even just for a few days.
Richard:
Absolutely. Just curious, were you there during the Indy race they had on the streets?
Jag:
It happened to be the same weekend. I did not see the Indy race, but I was there at the same time. The traffic was a nightmare getting around.
Richard:
It was a very, very, very exciting ending to that race. It was amazing.
Jag:
I got my convention knowledge, my hot chicken, and I got out of there.
Jag:
All right. So Rich, today we're talking about life insurance, which is really a confusing topic to me because I know there's so many different aspects of it, so I'm hoping you can break it all down for me. We're going to break this down today into three key areas. First will be the purpose of life insurance. Second, the different types of life insurance. Finally, what you need to know as an educated buyer of insurance. So, we'll start at the top. Rich, why life insurance? What's the purpose of it?
Richard:
Okay. It sounds like you were very organized with those three points. Probably those three points can explain everything about the life insurance, at least what the average person needs to know, so that's a nice list you gave. First off, I think the most important thing where most people acknowledge why they need life insurance, and that's to protect their loved ones. God forbid you pass away, the income for that person just stops. We have to replace that income. Other things people may not think of is also the savings. Every year you're working, you're putting money into the 401k plan, and that money is going to be used for retirement, not for you, but also for your spouse.
Jag:
Makes sense.
Richard:
You need to protect that. Also, sometimes people want to leave something behind. It could be for their children, it could be for a charity. They want to make sure that someone's taken care of, or that a charity still has that income, or that donation should I'd say, coming in to keep the doors open.
Jag:
Yeah, absolutely.
Richard:
So, I already started on protecting for the family. We talked about the lost wages. We talked about the 401k contributions. There's other things too you have to think about. A lot of people sometimes are only thinking about at that moment, but you have college. Some people want to make sure that their children are able to go to college, and they want to financially support that decision, and not put that financial burden on the children. We need to ensure that there's weddings, Bar Mitzvahs, celebrations... I have one client who wants to make sure there's money for a down payment as a gift for their child, for a house.
Richard:
A lot of times when we're doing financial plans, we have goals and those goals have to be protected also, like I said for the weddings and stuff like that. Also, in some states, let's say one spouse already passed away, there could be an estate tax or inheritance tax issue on the state level. There's the new IRA rules where a beneficiary has to take money out, non-spouse, by the 10th year of the death. That can cause a tax liability for an individual. So, having insurance to cover that is sometimes a need for insurance.
Jag:
Yeah. You made some really good points there, Rich. I think about the idea of.. The last year and a half has certainly taught us that the future is not guaranteed. You never know when something could happen to you, and knowing that if you have kids and you want to be able to provide or help them with these milestones, like you said weddings, bar mitzvahs, down payment on a house, anything like that.
Jag:
As you mentioned, the IRA just changed within the last year or two, where it used to be you could take out that money in an inheritance over however long you wanted, now it has to come out within 10 years, as you said, if you're non-spouse. That's really important to protect against all those kinds of things.
Jag:
You mentioned inheritance and donations. Can you dig in a little bit deeper on those?
Richard:
Sure. I have clients who say to me, when my parents passed away, I didn't get anything or very little... Or they got an inheritance, and they want to make sure that their children also have an inheritance. There are people who want to bequest money upon their death to their family members. There are insurance policies which can allow that. There's another big reason why you might need insurance for our child, not because you want to set them up and live in a mansion and live the life of luxury, but you might have a special needs child. Having a special needs child, a lot of times we see that the parents keep that child in their house. They're financially supporting them, they're paying the bills. At some point when both parents pass away or they get too old, that child may not have the same resources, they might need to go to a facility, a home. There needs to be money there to help support that child, and they've got a plan for that.
Jag:
There are people in my life that I know that have kids with special needs, and one of their biggest concerns is what will happen to my kid after I'm not here. That is certainly a good point. What about on the donation side of things?
Richard:
Sure. When I first got into business, I remember going to a conference [inaudible 00:05:51] had in Denver, and there was these two individuals, a father, son financial advisor team. They specialized using the Bible as their investment [crosstalk 00:06:03].
Jag:
Okay, hang on. What does that mean? What does that mean?
Richard:
Investing socially correct, and tithing, and the whole planning process.
Jag:
Oh, okay.
Richard:
I thought it was really interesting to have such a narrow market and way to position yourself. Now, I'm in the Northeast, I'm in Princeton, New Jersey, so I don't know if that would fly with the client base here. But, there are parts of the country which are very religious and are looking for an advisor like that. I remember talking to the son, and we were talking about insurances and so forth. He mentioned to me a lot of churches or other organizations are dependent on the donations every year. They have congregants who were tithing, and when one of those members passes away, it's a financial burden on the church.
Jag:
Oh, wow. I hadn't even thought of it that way. That makes sense.
Richard:
So, what they do is they usually, when they sell the life insurance, they include whatever that amount is for tithing 10%, as the charity being 10% of that beneficiary for that life insurance policy, this way, they would continue having a financial support from that person when they pass.
Jag:
So, the 10% they may be put into the proverbial collection played on Sunday... I mean, it's not that simple, but that's...
Richard:
It's like perpetual now.
Jag:
Yeah, exactly.
Richard:
... As long as it's managed properly by the organization. And, there is a tax advantage upon donating money upon death, if you have an estate tax issue. Everyone has a different situation. I would talk to your accountant about that.
Jag:
Yep. These are really all great reasons to purchase life insurance, taking care of your loved ones, taking care of organizations that are important to you and charities, and even in some cases there are tax advantages, as you said. But the real part that I get hung up on, Rich, is knowing what type of life insurance to purchase, and for how long. This is the part that makes my head spin. I really need your help explain this.
Richard:
When you're watching sports and they come out with a commercial for insurance, they don't really break it down in that 60 second, or 30 second commercial spot.
Jag:
True.
Richard:
So, I understand why you're confused. When you're looking for life insurance, there's a few things you need to consider. The first one is the risk you're insuring, meaning early death, estate taxes, whatever that risk is, should have a timeframe. The average person knows when they want to retire, they know if they're saving into their 401k plan. They know if they're disciplined in that way. They know when their kids should be graduating college and being on their own. You can put a time on that. Now, other risks like I was saying earlier about goals, like giving money to a church or for a special needs child, yeah there is a timeframe, it's your life. We have to buy insurance based upon the time period, because that would determine what kind of policy we're looking for. Once we know this information, we start exploring... We explain to the person looking for insurance on like how much death benefit they need, and what type of policy will cover that time period. If it's okay, let me dig right in. let's talk about some different policies.
Jag:
Please.
Richard:
The first one is the most common one is term insurance. Term insurance is basically you're telling the insurance company that you want insurance with a lock premium. The premium is not going to change for a set period of time. Usually, it's 10 years, 20 years, 30 years. It could be as little as one year. It could be 15 years. They're customizable, some of them. But that doesn't mean, okay, I have a 20 year policy on... Your 18, God forbid I just got diagnosed with something which could be terminal in the next four or five years. It doesn't mean on the 20th year, your insurance gets dropped.
Jag:
Okay. That's important to know.
Richard:
It means the premium is going to get adjusted.
Jag:
Okay. So, when you're doing term insurance, you are locking in a premium for the length of that term.
Richard:
Correct. After that term, the premium is adjustable. The problem is sometimes those premiums are really, really high. They always show you the maximum it could be okay. It doesn't mean it's going to be, but that's the maximum it could be. So, most people at the end of the term just let it go because that risk is gone. It's not there anymore, time has lapsed. But God forbid that worst case scenario, you got diagnosed with something. There are options to continue that policy, but at a higher premium. The good thing about term insurance, it's usually the least expensive type of insurance, which is nice because it allows you to buy a lot of insurance when you need it, and maybe you're not at the highest income point in your life. You know, you just got married, you had your first child... That's a big risk right there. You might be late twenties, early thirties, and your income potential hasn't really hit yet, but you need a lot insurance. So, this is usually the first place we would look for, to get large amount of insurance at a low cost.
Jag:
Okay. Got it.
Richard:
The next type of insurance we'll talk about is a little bit different kind of category. We usually lump this in what we call permanent insurance. Permanent insurance means that there's not a time period, it's going to be there to the day you die.
Jag:
Got it.
Richard:
So, this is for your charities. This is to cover tax liabilities, leaving inheritance...
Jag:
All the stuff we talked about earlier, yeah?
Richard:
Yeah. Some advisors out there promote using these type of insurance as another investment vehicle for retirement. I'm not a big fan of that until I explore every option to see what the most suitable for that person.
Jag:
Every situation is different.
Richard:
Every situation is different, exactly. There's pros and cons of funding retirement benefits within an insurance policy.
Richard:
The first one is what we call whole life insurance. Probably if you remember when you were a baby, the Gerber Life, your parents used to buy like five or $10,000 on the baby, and then they would get it later on in life. They can keep it, or...
Jag:
It's funny, actually my grandmother took out two policies on me when I was six months old. I found them, and they weren't really worth that much. I was paying this bill every year at some point, and I'm like, I'm just going to cash these out.
Richard:
Yeah, it's usually what happens. By the way, that plan's still available. But a whole life policy, the biggest thing on a permanent insurance is looking at who holds the risk. What I mean by the risk, I mean the premium increasing or not. Whole life, the insurance company holds that risk on the premium. They will set a premium, you can set it for life, or you can pay more and have it paid up to 65. They use assumptions knowing how much income it's going to generate, the premium is going to generate.
Richard:
There's something called a cash value. All of these permanent policies we're talking about today, all have a cash value. So, the premium goes in, and every month they pay a little bit, each month, to cover the insurance costs, and the remaining cash is there. They have you put more money in it each year to cover the cash, but also to build up a cash value. Let's make it simple. Let's say there's $10,000 in cash, and $100,000 in death benefit. If you should pass, first thing you need to understand is your beneficiaries are going to get the hundred thousand, not the hundred plus the 10.
Jag:
Makes sense.
Richard:
All right. I'm going to say this, it's going to be a little confusing. If it's confusing, stop me or ask me to explain in more detail.
Richard:
All permanent insurance really is guarantee renewable annual term insurance. So, every year... I'm looking at your face, it's confusing.
Jag:
No. No. Basically it's term insurance that you're renewing every year, is what you're saying.
Richard:
Right, and it's guaranteed to be renewed. It's only got to go through underwriting. What happens every year when you buy a new term insurance? You get a year older, you're a year closer to death...
Jag:
Sadly.
Richard:
... Based on the mortality tables, so your premium goes up. If this is a permanent policy, and it's designed to be there till your 82, 85, 105, and that premium is going to go up, to offset that premium, is the cash value. You're paying for the insurance... In our scenario where you had $100,000 death benefit, $10,000 in cash, you're only paying for insurance for 90,000.
Jag:
I'm processing what you're saying, give me a second.
Richard:
As your cash value goes up, you're paying for less death benefit. Even though the premium is going up, you're paying for less insurance because cash values from day one, zero cash value. You're paying for a full $100,000 death benefit. Fast forward a few years, you have a $10,000 cash value, $100,000 death benefit. So, the risk for the insurance company if you die is $90,000. That's what you're paying for.
Jag:
Ah, okay.
Richard:
$10,000 in cash, death benefit's a hundred. So, 10 of it is your own money. The insurance company is only paying for 90,000 at the deathbed. They're basically giving the beneficiary the hundred. Because it's only $90,000 of risk of insurance you're paying for, you're only paying for $90,000, whereas year one, you were paying for the a hundred thousand.
Jag:
Let me see if I understand this part of it right, Richard. If I'm going too far field, stop me here. As you pay more and pay these annual premiums, that cash value goes up, and of that a hundred thousand dollars benefit, more of it is coming out of the cash value, and less of it is the rest of the insurance company.
Richard:
Yes. You nailed it, exactly. So now when you're 75 and you're paying for this insurance, maybe there's only $50,000 in cash, $100,000 death benefit, and you're only paying for $50,000 of insurance now.
Jag:
Okay. Then you've been still paying the same premium all the way through.
Richard:
Correct.
Jag:
Got it, okay.
Richard:
On a whole life policy.
Jag:
Got it. Now I finally understand whole life insurance. Thank you.
Richard:
Perfect. The biggest thing to understand is that whole life insurance companies, assuming the risk based on the premium they created, the cash value will get credited with dividends. You have to look at how they're factoring all that kind of stuff. It's usually on profit of the company, or some interest bearing vehicle they own. But, you will get dividends within that policy to help build up the cash value.
Jag:
Okay. I'm still with you. What's next?
Richard:
Perfect. The next one is a variable universal life.
Jag:
Mm-hmm (affirmative). That's starting to use a lot of adjectives here, so now I'm a little nervous.
Richard:
You might hear it as a VUL. A variable universal life, just like a whole life, has the cash value. The whole thing we just talked about how it works, annual renewable term, and as you get older, you're paying for less insurance but the premiums higher... Same exact thing. The difference is the underlying vehicle, and who holds the risk. When you buy a variable universal life, your agent or sales person, whoever's selling you that insurance, is doing what they call an illustration. They're making assumptions on the return of the cash value. So, they're looking at current return to the market... Whatever they use, there's usually a maximum they're only allowed to show, and there's usually the worst case scenario. They're coming up with a suggested premium.
Richard:
The investments and the cash value are in what we call sub-accounts. They're just like mutual funds where they're investing in bonds and stocks. It could be balanced, a combination. In some of these sub-accounts, you'll recognize the names because they have the same name as the mutual fund. They're managed by the same companies, usually.
Jag:
Got it, okay.
Richard:
The premium is created in the beginning. You're hoping your investments do better than the illustration showed. If it's doing really, really well, you have the flexibility with your premium. You can lower your premium. You can maybe ask for them just to take it from the cash value, which they're going to do anyway. Or worst case scenario, is it underperformed. Now you have to put more money in for their premium.
Richard:
I can't tell you enough on how many times I have a new client come in, they bring in their documents and they have a permanent insurance policy, like a variable universal life. The first thing I say is, do you have an enforce illustration? What that means is, we go back to the insurance company, we see historically what has happened already, so we know what the cash value is. If we go forward currently the way we are, will this policy stay in force without me having to put more money in, or can I reduce my premium?
Richard:
I can tell you usually people buy these insurance policies, they put them in a drawer, and they forget about them.
Jag:
Yeah.
Richard:
They're agents' not calling them. They got hundreds and hundreds of clients, and they're not doing this.
Jag:
It's a set it, and forget it mentality.
Richard:
Right. One day, one of two things happens. They get a letter in the mail from the insurance company, it says, to keep this policy in force, you need to put a lump sum in of $35,000, or increase your premium to this. That premium increase is only going to be for a few years, then you're going to get the letter again.
Richard:
The other scenarios they come in and they see me or another financial advisor, and we order the enforce illustration, and then you should see their face when they realize it's not going to be there to the day they die, unless they make changes.
Jag:
Ugh! That is really important information to know going in.
Richard:
Yep. Variable universal life, you hold the risk and you control the investments within a menu of what the insurance company gives you, usually like 40, 50 different investment choices. It's usually a good selection.
Richard:
The last one is called a universal life policy. It's like a variable universal and whole life, where it has the cash value. Just like a VUL, a variable universal life, you're holding the risk, not the insurance company. There's different types of universal life crediting methods for the cash value. The first one, which was very common, was based on interest rates. As interest rates were doing well, you get credited for their policy, on your cash value for your policy. We see a lot of what we call equity index, universal life. These are when the insurance company gives like a benchmark, let's just make it simple, an S&P 500. They'll say you get 70% participation of the S&P 500. So, if the S&P 500 does 10%, you'll get a 7% credit to the policy. If the index does negative, usually you get zero. You don't go negative though, you don't have a loss. You're giving up some potential on the upside, but you're getting the protection on the downside.
Richard:
Those seem to be a lot more common now, for the universal life policies. Those are the three main type of permanent insurance. The majority insurance I usually see written for my clients is term though.
Jag:
That is important to know. As we move on here, Rich, is there anything else we need to know about permanent life insurance? I know it's a kind of a slippery slope, we could go on for a while on this.
Richard:
Every single insurance company comes out with all their specialty riders and things they can do, and they want to be a little bit different maybe than their competitors. If we have a couple of hours, I can just rattle them off, but I don't think anyone's going to want to listen to that. Let's just go over some basic common ones.
Jag:
Yeah.
Richard:
There's like a paid up policy, like guaranteed no lapse, which means that... Let's say I want permanent insurance, but I don't want to have a bill when I'm retired. I want to pay more now, and maybe stop paying it at 65. This can be on any of those policies. There is a way to take that risk from you on the VUL and the universal life and the variable universal life, and say to the company, I'm willing to pay more if you guarantee me that if I paid till I'm 65, let's say, that it won't ever lapse. That's a big one. I use that a lot. If I have to do permanent insurance for someone who's making good money and can afford that, I always try to reduce as much liabilities in retirement as possible. You probably heard me say, if times go bad in retirement, your market goes down, you can go from eating a hamburger to macaroni and cheese, but you don't want to go from living in a house to a tent.
Jag:
Make sense, yep.
Richard:
So, controlling your expenses in retirement is crucial. The big one right now is long-term care. Rider LTC...
Jag:
So expensive.
Richard:
Exactly. Long-term care insurance has gone up quite a bit since I got into the business. Not only that, long-term care insurance is not a lot of guarantee for premiums. You could be paying all this money, and then get a letter in seven years that they're raising your premium. They'll give you options. "Oh, instead of having compound interest, you can get simple, or go from 200 to 180, or just pay the increase." They give you options. They get around it.
Richard:
You can't bundle a permanent policy, can't do this normally with term... But permanent policy with an LTC rider. With that, just to make it simple, they all work differently. Let's just say you have a half a million dollar permanent policy, and you have the need for long-term care. Usually, they waive the premium going forward, and they allow you to use like 3%, 5% of the death benefit monthly. So, 3% of the 500, 15,000 is your long term care benefit. What's nice about that? The premiums aren't going to go up for the long-term care. It's built into this insurance policy.
Jag:
You're not putting a burden on your family at that point to pay for your long-term care, because you're actually pulling it out of the benefit, and just taking some of that, a little piece of it now, as opposed to later after you're gone.
Richard:
Exactly. But you just got to be aware that if you have that and you use it, you're also depleting that insurance for that goal you set forward, maybe for a special needs child, charity, or just leaving an inheritance.
Jag:
Right. You can't double tip. If you use it now, you can't use it later.
Richard:
Exactly. For term insurance, there's something called return of premium. What that means is you pay more than you normally would. Let's say it's for 30 years, and after the 30 years, they give you all your money back. You're not getting an interest. You're going to get exactly what you paid into it. You have to think about it, is it worth paying a lot more to get your money back with no inflation protection against your money? I hear this all the time, "Rich, the one reason I don't like term insurance is I pay all this money, and then when it's all done, there's nothing to show for it." My response is always, it's like paying for your car insurance and saying, "Shacks, I haven't used it for a while, so let me just go smashed into a car to put a claim in."
Richard:
Life insurance is not one of those insurance policies you want to cash in on. It's there to protect a risk, not to get rich on. So, I usually try to talk people away from that, because it's usually not worth it. There's a saying, buy the least amount of insurance and invest the difference, you'll be better off.
Richard:
The other things to be aware of, we talked about cash value, taking money out of the cash. There are provisions that you can take a distribution from the cash. A distribution would be taxable. All gains come out first, then your principal, your basis. Their taxes ordinate income, not long-term gains. Most people don't do distributions unless they do something... Where I'm about to explain and screw up.
Richard:
The next thing that you can do is take a loan from your cash value. On the loan, you borrow a certain amount of money, which leaves enough cash in the policy to keep the policy in force.
Jag:
That's kind of a case of emergency break glass thing, if you need to tap into an emergency resource, I'd imagine, right?
Richard:
Yeah. Or sometimes you forget to pay the premium, and they just take it from the cash. You can usually, on the application, you can say do it as a loan. A lot of people will over fund these, to take money as loans in the future tax-free. That's the thing I was talking about, you can use it for a retirement savings. I'm not telling you to do that, there's pros and cons like anything. There are a lot of advisors out there who say, if you max out your 401k, you're doing everything you can, this is another possible investment vehicle you can use for insurance, and to subsidize your retirement.
Jag:
Got it.
Richard:
Let's say the risk of doing it though, let's say you take out too much money and the performance of the rest of the cash doesn't do well, guess what? You got to put money in that policy, or payback some of that loan.
Jag:
To keep it in force. Got it. Okay.
Richard:
What happens if you don't? Let's say you're like, I don't even need the insurance anymore. Just cash me out. You have a tax liability.
Jag:
Got it.
Richard:
So, you got to be careful there. If you do have a cash value insurance policy, there is a code in the IRS called a 1035, section 1035, which allows you to transfer money from a life insurance to annuity tax rate.
Jag:
Got it.
Richard:
They carry over the cost basis inside a taxable event. Again, pros and cons. You got to weigh them all out for your situation.
Jag:
So Rich, I'm going to save this podcast so that I can refer back to it the next time I'm in the market for life insurance, which is on my to-do list, as it is I'm sure many of our listeners. You've just done a really good job of breaking down the different types of insurance. What about when it comes to purchasing the insurance, and you're ready to pull the trigger? What do our listeners need to know?
Richard:
Normally, what most people do is they go to Google, if they don't know somebody, and they find a local insurance agent in the area they live, and they sit down with them. Hopefully, you ask your friends for referrals and who helped them. Do due diligence. The first thing is you have to understand what a broker is, and an agent. If you go to an insurance company, like let's say Allstate, Allstate will sell Allstate insurance. There are a captive agent, they sell their products. A broker is someone who can represent multiple insurance companies. I'm not saying one's better or the other, but there are times when insurance companies purposely do not want to take on more risk selling more insurance, so they raise the premiums. When they want to bring in more revenue, and they could take more risk on books, they lower their premiums.
Richard:
So, shopping out the insurance is important. With a broker, they'll usually give you a spreadsheet of all the different insurance companies, and show you what the costs are across them. An agent will show you what theirs are. But if you have someone you're working with, who's an agent like your Allstate agent, you can give them the opportunity to quote it. You want to make sure the insurance company is a good insurance company. You want to make sure that they're there to pay it out. You should know if they're a broker or agent. You can ask them that. The other thing is a lot of times if you're using a financial advisor, there are financial advisors who are insurance licensed, who can also do this for you. They can quote out insurance.
Richard:
For me, I usually do the financial plan. I'll tell them they need insurance. I always say to them, you can go out, if you have a relationship, give them the business. If you don't, I can give you the insurance quotes, you can buy it through me, but you don't need to.
Jag:
Got it.
Richard:
I want to have that independence option there.
Jag:
For sure.
Richard:
The other thing is, make sure there are professional. Anyone who's selling you insurance needs to take time to sit down with you to go over what your income is, what your risks are, your time periods, your goals. They shouldn't just off the top of the head say, you need a $1 million term policy. They might be able to tell you at that time, but they need to ask you the questions to make sure that you're buying the proper amount of insurance.
Jag:
That goes back to something we talked about a lot, Rich, which is, every individual situation is different. We talk about that in every podcast. It's not a cookie cutter approach. You need to find someone who's going to take the time to understand your wants, needs, plans for the future, and find the right fit for you.
Richard:
Right. You have to understand something, when you're going through this process, you got to remember the person selling you insurance makes a commission. It's not like you're running a check for an hourly service for their advice. You're paying them... Actually, you're not even writing the check. You're writing the check to the insurance company, and then the insurance company's paying them. So, just remember the higher the premium usually, the more commission they're getting paid.
Jag:
Yes.
Richard:
If you're 25 years old, and they're recommending a permanent policy, you might want to question yourself and question them, why permanent over term when you probably need a lot more insurance to cover your risk, especially if you're married with a child. Be smart about it. If they're recommending something which I'm saying you should be questioning like permanent for a young person, make sure they explain that.
Richard:
The other thing is, at some point in life, no one dies healthy. You might have some health conditions, you might be on some medicines, and that's going to affect the underwriting for insurance. Usually, insurance is rated as standard... Standard smokers, non-smoker. Preferred, preferred plus. There's might be some in between. Then there's sub categories below standard. So, it's important to let your salesperson, your insurance agent or broker, know what your health issues are, what medicines you're on, because they can do a preliminary application without really putting your name or submitting it to an insurance company, or they even have you go through full underwriting, like medical and stuff, and then submit it to multiple insurance companies to get the best offer.
Jag:
Got it. Okay.
Richard:
Now, there is a time where I would say that sometimes a permanent insurance policy is good for a young person. With permanent insurance underwriting for more riskier classes like below standard, some of the companies will give... Tier rating increases automatically. They'll say, if you're at this tier, we'll move you up three tiers up or two tiers... You have to be below a certain one. They'll do that, one, for competitiveness. They're willing to take that risk. So, you might not qualify to get term insurance, but you might qualify to get a permanent policy. That might be one exception to my rule.
Richard:
Jac, I know that we spent a lot of time, and this might be confusing to a lot of people, so I don't want to throw out too much more. I want to close this on the life insurance. My biggest advice again is educate yourself on what you're buying, and when you buy something, starts you with a permanent policy, find out if there's a surrender charge. I told you the person selling to makes a commission. The day you submit that check and got approved, about a week or two later, they're getting paid. What happens if you were to cancel that policy three months, six months, a year, three years, five years, seven years... What happens to your cash value?
Richard:
Most insurance companies which have cash value, have a surrender schedule. They'll say you surrender within the first year, there's a 7% surrender charge, might be six the following, and then they'll just keep going down till it's surrender free. They should show you that on the illustration. They should show you the years of the premium, the cash value... The surrender value, and then the cash value. You should be able to see it. You need to understand that because you're going to be putting money in this, and let's say five years, buyer's regret, it's going to cost you money to get out.
Jag:
Yes, that's really important point. I'm glad you brought that up. So Richard, if somebody has questions about life insurance, you've done a good job outlining it today, or anything related to financial planning, retirement planning, their financial future, what are the best ways to find you at New Century Financial Group?
Richard:
Well, you can always pick up the phone and give me a call. I love talking to people. (609)-924-2049. My direct extension is 1-2-6. You can always shoot me an email at roring@ncfg.com. Or, you can go to my website at www.ncfg.com. On my website, there's even a link where you can schedule time to talk to me, do a zoom meeting. If you want a second opinion on what you're being quoted at, feel free to give me a call, and I'll take a look at it.
Jag:
Sounds good, Rich. Thank you for clearing up a lot of confusion, at least for me personally, around the subject. I think you did it for our listeners as well. Take care, we'll talk soon.
Richard:
Thank you.
Jag:
Richard Oring's, branch offices is 1 Airpark Place, Princeton, New Jersey 08540. The branch phone number is (609)-924-2049. Securities offered through Royal Alliance Associates Inc, member FINRA-SIPC. Advisory services offered through New Century Financial Group LLC, a registered investment advisor, not affiliated with Royal Alliance Associates Inc. New Century Financial Group LLC and Royal Alliance Associates Inc, does not offer tax advice or tech services. Please consult your tax specialist for individual advice. We make no specific comments or recommendations on any tax related details.