Making Sense of Life Insurance - What to Avoid!

I get it, trying to wrap your head around life insurance can be pretty overwhelming with all the different choices out there.

But let's keep it real and break it down. We're going to figure out what you should really be on the lookout for in a life insurance policy and steer clear of some common mistakes.

In this episode, I'll break down the different policy options and dispel the misconception that life insurance is all about making an investment. Even more importantly, I'll point out some traps you should avoid so you don't end up buying something you don't need.

Remember, life insurance isn't a one-size-fits-all solution. It's designed for a specific purpose, so you should tailor it to your own needs and goals. Skip the flashy ads and complex schemes, and focus on a simple, straightforward financial plan that suits you.

So, give this episode a listen for a deep dive into the world of life insurance.

IN TODAY’S EPISODE, I DISCUSS: 

• The pros and cons of term life insurance
• The benefits and drawbacks of whole life insurance
• How to avoid getting caught in misleading investment claims

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Transcript

1:56

My guess is that unless you've been living under a rock, you have had someone talk to you about life insurance in the last, I don't know, six months, year. Because life insurance salespeople are coming out of the woodwork and they have these newfangled ways of packaging and wrapping life insurance and calling it investments and doing those kinds of things. And I know this episode is going to rub some people wrong. It's going to piss off some life insurance agents, but I want to demystify this whole life insurance game and tell you exactly and specifically what you should be looking for, where the pitfalls are, and who really is getting rich with these policies. So welcome to this episode of the affluent entrepreneur show. Let's talk about life insurance. I'll see you in the episode. This is the affluent entrepreneur show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, mel abraham, and I'll be sharing with you what it takes to create success beyond wealth so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money, and scale your life while creating a deeper impact and living with complete freedom, because that's what it really means to be an athlete. Entrepreneur life insurance, we have all probably experienced it at some level or another. Someone coming up to us and saying we should have life insurance. And you know what? They're right that in many cases we. Should have life insurance. But when should we have life insurance. And how much and who should have life insurance? It's not all the same. It's not all the same. I remember sitting, sitting in a situation where I was talking to a family member where someone literally sold policies to them for their teenage kids. Hold on a second. Why are we insuring the life of. A teenage kid versus putting money into. An investment for that teenage kid? Now, it was wrapped up saying it was an investment. In fact, when they talked to me. About it, they said, this is an investment. No, life insurance is not an investment. I want to put that up front. Life insurance is an insurance policy. They can dress it up, they can put lipstick on it, they can do. All the things that they want to do and call it all kinds of fun names, but it is insurance nonetheless. And if they're going to try and. Put investments in it, we'll talk about that, okay? But in this episode, I want to demystify it. I want to talk about the general elements of different insurances, the different types of policies you can get, which ones I like, what are the pros and. Cons of each and tell you what I think and maybe give you a. Perspective that hopefully keeps you safe and keeps you from putting a lot of money out with not a lot of value coming back. And the only thing you're doing is paying for a whole lot of commissions to an insurance salesperson that has a biased desire to sell you a policy. Okay? Now, I know that I have just made enemies of anyone that sells life insurance, but I'm okay with it because I'm not here to sell you investment. I'm not here to sell you insurance. I'm here to sell you on your dreams and to do it the right way. Okay? And so here's the thing. Let's jump to the iPad. I'm going to talk about the different policies, the pros and cons of each, what they are, give you a perspective. And then we'll talk about how to. Put these things in place. Okay? The first is this idea of a term life insurance policy. This is what a lot of people get. What a term life insurance is, is that it's for a term, just like. It says, I'm going to insure my. Life for a term for a number of years. It could be ten years, 20 years, 30 years. And for that time frame that I'm. Going to insure my life, I'm going to pay a premium to make that happen, okay? So I'm going to pray the premium every year, and typically the premium is a set premium for that period of time. And I have actually two of these policies. And so a term life insurance is insurance for a specific period of time. That you decide to have, and the. Person that is insured, if they pass away during that time, the insurance policy. Will pay off to the beneficiaries of the policy. Okay? This policy, the thing that is really good about it is it's for specific terms, so you can do it for a specific term. We'll talk about when to get this, when it's appropriate. In general, it is far more affordable because it is simply an insurance policy. All you're getting is the death benefit, okay? All you're getting is the death benefit is that you know that if you buy a million dollar insurance policy, a. Term life insurance, and it's a 20 year term, if you die during that. 20 years, someone gets paid a million bucks. That's it. It's simple, it's easy. That's what you get. You pay the premium, they pay out upon death. Now the cons is the coverage ends. It goes 20 years, and at the end of 20 years, you either have to re up and it's probably going to cost more because now you're older. Or you have to get a whole new policy. There's no investment growth, which it's a con, but I don't think it's a con. As we talk about now, the premiums may increase once it expires, you may. Have an increase in premiums to get. Back into the same level of policy. There is another thing that happens, and this is something that happened with me, is that happening but we don't need the life insurance at this stage of. The game because of where we're at. You have something that's called insurability. In other words, the healthier you are, the younger you are, the lower the premiums are to get into an insurance policy, any kind of insurance policy. And this insurance policy, because it's a. Term policy, let's say it's 20 years expires in 20 years. And if you had a situation like I did, where you got diagnosed with cancer and went through all of that, it affects what you call insurability. So when that 20 year policy expires, they may look at me and say you're not insurable or they're going to rate it and they're going to really. Crank up the premiums because of the. Proximity of the cancer to me trying to get insurance. And so one of the challenges with term policy is that when it expires, if you're less insurable or uninsurable, then you cannot get another policy. You need to be aware of that. To make that happen. So that's one end of the spectrum. That's what we call a term policy. The other end of this spectrum is this idea of a whole life policy, which is what a lot of insurance agents really like. And what they do is that they. Say they'll also call this permanent. Permanent because. It doesn't really expire, it's lifelong coverage, okay? So a whole life policy is you're putting money in to a policy and. You'Re actually paying the premiums plus some. In order to do that. So you get lifelong coverage. And because you're paying additional premiums over and above just the insurance, you get this thing called cash value growth. In other words, there's a surplus of. Cash sitting in the policy, okay, surplus. Of cash sitting in the policy. And you get a death benefit like any other policy. But it doesn't expire as long as. You can keep it fully funded. So you can use it as an estate planning tool to maybe pay estate taxes, that kind of thing. In doing that. Now, there are some cons to this. There's a number of cons to it is that with a whole life policy, it is more expensive because you're getting lifelong coverage and you're funding some cash value, or an investment component if you will, in it, okay, slower growth and lower returns than if you were to invest outside the policy. I don't think that insurance policies are good investments from an pure investment standpoint. There has to be a strategy and a purpose behind it to make it work. The premium payments are required throughout and they'll be ongoing. It's a little more complex. Than a. Term policy because you're building a cash value in there. So basically they're saying, hey, pay us more than the premium would cost on a term policy. We'll take the rest and we'll invest it for you. And we'll call it something called cash. Value and give it to you. So that's a whole life policy. That leads me to this next policy. These are derivatives of a whole life policy. And there's this idea of what we call a universal life, what this does, where a whole life policy or term. Policy has set premiums, a universal life is more flexible. It's still permanent, lifelong coverage, but you have the ability to adjust premiums. There's a flexibility in the premiums. You still have some cash value growth and you can actually withdraw or take loans away from the policy. This will come back in another situation because this is something that a lot of insurance agents will start to play around with and say, well, you can get money out of the policy by taking loans. Okay? That's robbing Peter to pay Paul. It's taking money out of your right pocket, putting in a left pocket. It's just a different way of looking at things. But what bothers me is that when they present these things, they present them with these sparkles and this shine, thinking that it's this wonderful investment. No, it's a freaking policy that gives you terms where you can have flexible payments and you can borrow against it and do those things. Why not call it what it is? And it's just the fact that they can't even call it what it is makes me concerned about how they're trying to mislead or bring anything in to do that. The fees can vary depending on the policy, depending on the options that you. Take and the returns. If you look at the cons on this, you got to monitor the cash value because that's the thing that's going to allow things to get funded. The returns are tied to interest rates and investment performance. So if interest rates go up or down or investment performance goes up or. Down, the performance of the policy may. Go up or down and it may not perform as illustrated and the premiums might need to be adjusted. So one of the things that a lot of these insurance agents will do is they'll give you what they call an illustration. Here's how the policy would work. But you got to look at the assumptions in the illustration. Are they reasonable assumptions for the long term? And if they give you the best assumptions and it looks like the policy is going to make you millions. But we know that the market doesn't. Operate at the best level all the time. So we got to be smart about it and realize that they're not financial planners, they are salespeople, they are selling insurance. And I'm sorry for the insurance agents that might be offended by this. Some of you are much more sophisticated and you do the right thing, some don't. Just being straight about it. Okay. So the next one is indexed, universal life. So we're layering on complexity. And so universal life is the last one which we had flexible premiums in here. We have flexible premiums, but there's another element to it. They now tie this policy to a market index, SP 500 or something. So your growth, investment growth, will go with a market index. You can take loans and withdrawals out of it against the cash value, but it may affect the premiums as you do it. It's much more complicated of an instrument. But it's still a policy that you're paying additional premiums to have it invest in a market index in doing that. And so you're tracking a lot of factors. Here's some of the cons. The returns are subject to caps and other limitations. So here's what happens. They will promise you a certain level of return up to a certain amount. So if it's tracking the S and. P 500 and say that the S. And P 500 goes up 20%, the policy might only allow you to participate the first 10%. So you get a 10% growth, the market went up 20%. Who do you think keeps the other 10%? Yes, the insurance company. So understand how they play that. They're not giving you anything for free. They got to be able to pay the bills. And so when you're doing this, you got to understand that there's caps on this. And you got to look, each policy is different. And so one of the cons is that there's caps and other limitations. The fees are higher than other universal life products, and growth is tied to a market index. So if the market index goes down, what happens to the policy? You got to look at what's going on with it in doing that. But that's what an indexed universal life is. Then you have something called variable life insurance. Well, what is that? Well, here's the deal. Now we're kind of stacking things on. You actually have investment options. You can allocate the premiums between different investment options. So you can kind of control a portfolio inside the policy. But here's the deal. If I'm going to create a portfolio, why do it inside a policy? Why not do it inside my own. Portfolio and have them take a piece of it? There's a death benefit, and cash value can grow with performance. But here's some of the cons. You've got investment risk based on your allocations. It requires active management, higher fees compared to other life insurance policies. And again, you have caps. You have participation percentages that you may not know about if you don't read the fine print. And so these are all policies that are insurance policies dressed up to be seen as investments, but they're not. They're a hybrid thing where they're saying, hey, we have an insurance policy. We'll get you your death benefit, but we'll take additional premiums for you and we'll invest them for you. And we're going to keep some of that in the form of commissions or excess returns or anything like that. Okay? It's really important to understand that these are not necessarily investments. Well, that leads me to the crux of all this. When do you need life insurance? How much do you get? All right, so let's just look at. A couple things that I think really are important. So when do you get life insurance? One is that you get it when you have dependence. You don't get it on teenage kids. Unless all of a sudden there's special needs or there's something there. There's got to be a reason for it. There are better investments to go into than an insurance policy for a teenage kid. You get it because you might have financial obligations that need to be taken care of. For instance, if you don't have enough assets to pay off the home and God forbid you pass away and you're the breadwinner, you want to make sure that the surviving spouse has the ability. To pay off the home. You may get it because of your age and health. You may get it because you have special needs or you have a special needs child. If, God forbid, you have a special needs child, you want them to know that they're cared for. And if something happens to you, you have a policy and in all likely a trust that sets a situation where they're cared for and their special needs are attended to. God forbid you pass away. You can use it for estate planning. You can use it to pay for education. If you're gone. Remember, a life insurance policy doesn't pay off until you die. Okay? They call it life insurance, but it's really death insurance. It happens at death. And I get it. They'll talk about, oh, if you have a whole life or permanent or one of these other newfangled things, you can borrow against it and take the money out tax free. I get that game. I get that game that they're playing, all right? But it doesn't make sense. The purpose of insurance, in a nutshell, is to replace your income for those. That depend on it, should the income go away because you pass away, that's. It is to replace your income to. Take care of the people that depend. On the income if you pass away. Now, it can also be used, let's. Say, that you have a spouse that. Is at home with the children and. You happen to be the one that's. Bringing the money home. You have the money, but you still. Need someone to take care of the children. And so if, God forbid, that spouse passes away, you may need insurance on that spouse. He or her, doesn't matter, to make. Sure that you're going to be able to do that. Now, at some point, if your money. Machine, as we talk about it builds large enough, you're not going to need. It because you can self fund. Okay? So you want to be able to replace the income. How much do you get it's for? Income replacement? Seven to twelve times your income. In all likelihood, sometimes more, sometimes less. You might look at it and say, wait a second, I need some specific amounts. For instance, a special needs child, for instance. There may be a specific debt that you want to pay off. So you can sit back and say, I want to replace my income, but I also want to make sure that these things are taken care of. But insurance in general, life insurance in. General should be part of a cohesive plan. Remember, when it comes to finances, when. It comes to personal finance, we don't do finance at the tactical level. Before we look at the vision level, we create our financial vision, our lifestyle vision. First we understand what that is. We then use the vision to inform the plan. The plan will then inform the strategy. The strategy will inform the tactics, and the tactics will inform the actions. So as part of the vision and the plan, do you need life insurance? Maybe you do, maybe you don't. It depends. But the point is that it's about income replacement. It's not about investing. It's not about that. So let me summarize this here, and then I want to talk about something else that I think comes up a lot that I have some strong opinions. On, which is pretty much everything. It's all right, so bottom line, term insurance. Term insurance is for a term. It's lower cost, low fees. It's straightforward. You have set payments, no cash value. Okay? Whole life is permanent insurance. It's considered permanent insurance. Higher cost, higher fees. It's more complex. You have set payments and there is cash value. Then you have universal life. It's permanent insurance. Higher cost, higher fees, much more complex. You have flexible payments, and you can. Actually get into investments with them, okay? And this can be regular, universal or index universal. Then you have variable life. It's permanent insurance, high cost, high fees. Most complex flexible payments, and you have investments in there. That's the summary. Now I want to talk about something that is something that gets popularized anytime. There'S uncertainty, and I see it going. On a lot right now, and that. Is something that I call the infinite banking scheme. Yes, I called it a scheme, okay? They title it all kinds of things. They call it infinite banking, permanent personal bank, the vault. I've heard that called, okay? It's a freaking insurance policy. If you have to name it some newfangled, name it's because you don't want the public to know the reality of it, okay? So why not call it what it is, a whole life policy that's structured in a way that allows you to try and leverage cash value. That's what it is. But you dress it up to talk about it as if it's something else. And I'm sorry. It's misleading. Okay, here's what they say. Here's what they say. It's a whole life policy. It leverages cash flow. They're trying to create something where you have the ability to borrow from the money. And they say, well, it's like your personal bank. And they say, this is what the Rockefellers did, and all the other you're. Not Rockefeller, not at this point. Hopefully you will get there. The money is borrowed from the cash value, and the cash value still grows because of the structure and all that. Here's some of the issues, okay? The costs are tremendous. In many cases, the growth on it. Is slower than direct investments. In many cases, the complexity to do. It right is high. Okay? In order to track it and do it right, it's high. It takes time to build enough cash value that you can actually use it like a bank, like they say. But the bigger thing is that this is the only weapon they have. And they sell it as a cure all to whatever woes you have. And they say, this is the recipe to your financial freedom. Put this in place and you'll be good. But then you're married to premiums, high premiums, high commissions for a long period of time until you can get any kind of benefit out of it. Then you're married to complexity that you. Don'T need in your life. I'm sorry. I don't like it. There's very few situations where I think that it's the right thing to do. There may be a few. But for the people that are starting out, the people that are doing these things, let's start off by creating a sound financial plan, a sound investment plan, a sound money machine based on sound principles that don't bring complexity into something. You don't need, okay? Build the right portfolio, do it consistently over time, and build the wealth you need to have financial freedom. Don't get caught up in some of these crazy, weird schemes. If it is complex and they have to draw it out on a big. Board, then we probably ought not be all right. Remember, investing shouldn't be an adrenaline rush. It should be boring, it should be consistent, and it should grow over time. So that's my take on life insurance. Here's what I think you all should be thinking about. You buy insurance for insurance purposes. You don't buy insurance for investment purposes. That means that term insurance is probably the way to go for most of the people, unless there's a specific reason you need some sort of permanent insurance in place, special needs or something like that to last a lifetime. But it is based on facts and. Circumstances, and there isn't a one size fits all. I hope that this helps clarify the life insurance game that's out there and that you can now clearly walk through and say, here's what I need, here's what I want. And that you don't get duped or you don't get swayed by marketing. Speak about things that probably aren't going to serve you in the long run. All right, thank you for being here on this episode. I hope you found it valuable, and. I'd love to hear from you. So if you have any questions or. Anything, hit me up. And at the same time, while you're at it, love to have a review. So go tag me a review, hopefully. A five star review, and let me know what you think of the show. All right? And I look forward to seeing you on another episode of the affluent entrepreneur show. But until then, always, always strive to live a life that outlives you. Cheers. Thank you for listening to the affluent entrepreneur show. With me. Your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the affluent entrepreneur facebook group now by going to mel Abraham.com/group, and I'll see you there.