Term vs. Whole Life Insurance: Which is Right for You?

Term vs. Whole Life Insurance: Which is Right for You?

In this episode of 'The Retire Early Retire Now' podcast, host Hunter Kelly, a certified financial planner, focuses on the importance of life insurance for high-income earners. Hunter discusses the differences between term life and whole life insurance policies, providing insights into which option might be more suitable based on individual circumstances. He highlights the affordability and flexibility of term life insurance, especially for young professionals, while acknowledging certain scenarios where whole life insurance could be beneficial. Hunter also touches on the financial implications, potential tax benefits, and strategic planning around choosing the right policy. Listeners are encouraged to assess their own needs and consult financial or insurance professionals for personalized advice. The episode is educational and offers practical guidance on maximizing and protecting wealth through appropriate life insurance choices.

00:00 Introduction to the Podcast

00:14 The Importance of Life Insurance

02:18 Understanding Term Life Insurance

07:21 Exploring Whole Life Insurance

13:43 Comparing Term and Whole Life Insurance

16:02 Special Considerations for Life Insurance

17:22 Conclusion and Contact Information

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Transcript

0:00

And welcome back to The Retire Early Retire Now podcast. I'm your host, hunter Kelly, certified financial planner, and I do this podcast every Tuesday to help high income earning professionals maximize their wealth. And today we're gonna talk about ways to. Not maximize your wealth, but protect your wealth, and that is through life insurance. And as a high income earning professional, you may have been pitched life insurance before. Maybe it's a life insurance policy that lasts your entire life. Build some cash value. It sounds super appealing, right? Who doesn't want an investment and be able to grow cash value in their life insurance policy? In fact, this permanent policy that they probably tried to sell you is the most common type of policy sold in the US today. I. But do you really need it? Many doctors and attorneys and business owners that I speak to have been sold these expensive policies, even though the vast majority of Americans don't actually need that. They just need something called term life insurance. And so today we're gonna talk about which is the best choice, for you, given your situation. We're gonna understand what term life is, what whole life is, and some factors on. What you should do to help you consider each one and which one's the best for you. But before we get started, go ahead and follow me on your favorite podcasting app. Share this with a friend and leave a five star review. It helps grow the podcast and I am very thankful for those that continue listening and hopefully you find this valuable. If you'd like to hear a parti particular topic. in a future episode or maybe, you have a question about your own situation, I would want to hear me answer it on the podcast. I would love to hear from you guys. There is a button. In this show notes where you can click, it says Text me. You can text your questions or your suggestions in that link. would love to hear it and would love to talk more about your specific situations, to help you out. And obviously this is for educational purposes only, so don't make any final decisions based off his podcast alone. Please seek a, financial or insurance professional before making decisions about life insurance. but let's get started today on life insurance. So let's start with term. We've talked about this in previous podcasts, but it's been a while. So if you're a new listener, hopefully you'll find this helpful. And if you've already listened to the previous ones on life insurance, hopefully you'll find something today that is useful if you're still shopping around and deciding which one's the best for you. So term life is easy. It is exactly how it sounds. It provides coverage for a fixed period of time, generally 10, 20 or 30 years. And if you pay those premiums over that time period, you'll have coverage for a specific lump sum. Could be 500,000, could be 250,000, could be 5 million, whatever your needs are, that you apply and qualify for as long as you pay those premiums over the term of the policy. You'll receive that benefit in the event that you pass away. And so this is a very straightforward, it's more affordable, especially if you're young and healthy. it can be, 10 times more affordable, than whole life that we'll talk about here in a second.'cause you're not paying to unquote build your cash value. You're not paying to have this insurance for potentially 40, 50, 60, 70 years. You are paying to have this insurance for a much shorter time, and there's no cash value being, built up in this account. So it allows you to get insurance for cheap for a certain amount of time and allows you to take that extra cash that you would be spending on this cash value policies and go ahead and invest that or pay down debt, whatever that case may be. Right. And so this is ideal for income replacement if you were to pass away. So again, specifically to high income earners, if you're making 2, 3, 4, 5,$600,000 a year, you're so early-ish in your career, maybe you still have 10, 15, 20 years of working. this can be detrimental to help your family building wealth. So if you have young kids, if you have mortgages. other types of loans, student loan debt, things of that nature. If you pass away and your income is gone, how is your spouse, how is your family going to be taken care of? How are you going to pay off this debt that maybe your family would be left with? Term life can be that, stop gap for these years of, the need for this income to help pay down these debts, or these allegations. And I hate saying family's your obligation, but the obligations that you have set forward. Because you've gotten married, had kids, things of that nature, the responsibilities that you have, right? So for a quick example, a doctor that's 37 years old, cardiologist earning$400,000 a year with two young kids, chooses a$3 million 20 year term policy costing around$1,500 annually. if you were to do a$3 million policy, that's a whole life policy. And that could be upwards to 10 times as much, 15 to$20,000 depending on how it's written and what the purpose of that policy is. So now you can take that extra. 10 to$15,000 and you can go put that, in an investment account and hopefully outperform, those, whole life policies that generally, typically underperform. and as you can bet, or as you can tell here, I am, definitely biased toward term life, I think, Whole life can be good in certain situations, but the vast majority of people, can easily use term, invest the rest. And the idea would be that, okay, I'm 30 In this, particular example, the doctor is 37 years old. she probably has another 20 to 25 years of working depending on what her goals are. well, I can get a 20 year term and then I can build wealth. Throughout that 20 year term, and hopefully at that point, at the end of that term, I am self-insured or maybe before that. Right. oftentimes, back when I used to sell insurance, I would do what's called a laddered term strategy, where maybe instead of this. A particular example, she got a 3 million, 20 year term. Maybe she gets a 1.5 million 10 year and a 1.5 million 20 year. Whereas now she has 10 years to build wealth and at that 10 years, maybe she doesn't need all$3 million of insurance to pay for, that she can drop that. 10 year off, save about half of her premium per year and go ahead and put that into investments, right? or the premium's just low enough where she can pay the, the$1,500 annually and, go ahead and just get the 20 year, whatever makes sense for her and her situation. But, the idea is to invest the rest become. Financially independent or not need self in, not need that insurance become self-insured. and and the best way to do that is through term insurance because it's going to be much more affordable, and financially. Sound over the long term now, whole life. What is the difference? Well, the obvious difference is that you're going to have that insurance for your entire life. And in that there's a portion that is going to go to the insurance, and there's a portion of that's going to your cash value savings. So you're going to, end up building a small nest egg or a large nest egg depending on how much you're funding this thing, in this, insurance policy. Now the downside is that it's going to be more expensive because of that. the insurance company is insuring you for a much longer time period, and the likelihood of you passing away and them having to pay out this policy is going to be higher because again, it's for your entire life. So that makes it more expensive. You do get lifelong coverage and there are some tax benefits, that you can take advantage of that we'll talk about here in just a second. But on average whole life, specifically is going to, yield you less return than going into, an investment account where you can tailor your. investments to maybe your risk tolerance and your risk capacity or your specific situation. So if you were to build an all equity portfolio and run it up against, a life insurance, whole life policy, that just say the s and p alone is going to vastly overperform over a long period of time what you could receive in these whole life policies. Now, the allure, what. The insurance guys try to sell you on, or gals try to sell you on, is that this is a rich man's Roth. Okay? Um, and what that means is, is if you make over about 230 to$250,000, the IRS is gonna say, Hey, you can't contribute to your IRA, or your Roth IRA'cause you make too much money. Well, one. given certain situations, you can through what's called a backdoor Roth, IRA contribution. And, there's other ways that you can contribute to, these accounts where, I. Or other ways you can contribute to investments that would yield you higher returns over a long period of time. Now, in the life insurance where they're trying to get at, what's a, a rich man Roth? If you put, money into these whole life policies and you start to build this taxed. or if you build this cash value, it's going to be tax deferred, right? So you're not gonna owe taxes on, this money along the way. And if you take the loans off the policy, so you keep the money in there, but you take the loans off the policy, then it would be tax free, quote unquote distributions or, loan distributions would be tax free. Now it sounds nice one, the issue is that whatever, I've had issues with agents, life insurance agents doing these projections, and they're going to run this projection at a much higher rate of return than what's actually going to happen in these whole life policies. so they're gonna make it look a lot better and a lot more fruitful than it actually will be. One, two, if these policies lapse, so let's say you do get some significant gains in it because you've had it for 20, 25 years. And for whatever reason, this policy ends up lapsing, you're gonna owe ordinary income tax on the entire, gains that you have earned. So if you have a hundred, 200,$300,000 worth of gains, this policy elapse for whatever reason, likely later on late, late in life, because again, these things take a while to, to come to fruition, you're gonna owe, ordinary taxes on. The gains that you, had inside these policies. So again, if you had$200,000 worth of gains, you're gonna have$200,000 worth of ordinary income. So you have to be very careful about the loans that you're taking off of this. And then if you're using this for an actual benefit to your heirs and you're taking loans off of this, this is going to come out of what they would end up paying your beneficiaries. So you have to be careful with these. and so I think that these live insurance agents, they oversell and under deliver on these policies. Now, some of these policies can be good, if you're inching up toward, the estate planning limits or the estate, The estate net worth limits of 22 to$25 million for a couple and$12 million for an individual. Then these permanent policies might make sense for you.'cause now you can start to use things, what's called a eyelet, so a life insurance trust. Where you can, basically take the life insurance out of your estate and maybe, pair it to pay, taxes that your heirs will have to pay. So maybe you get a policy where you can cover a portion or all of the taxes that would be taxed, on your estate, when you pass away and give this money to your kids or whoever you're giving it to, right? so for example, an attorney Michael, 45, years old. High net worth has 12 plus million dollars. They'll say he's not married, wants to guarantee a legacy while choosing a$2 million whole life policy costing$20,000 a year will help maintain, help, will help mainly for, estate planning and guaranteed inheritance. Right? So if he has north of$12 million as it stands now. his heirs may pay up to 40%, or his estate would pay up to 40% on that$12 million. Right? And so if we can go ahead and pair that with some estate planning and that, that life insurance policy, well now we can potentially pay for this life insurance policy, get the$2 million to help pay for, taxes that could be incurred. Um, and so. This is just, one of the areas where I think a whole life policy would make sense. Now, if it's for accumulation early on in your life, I would start with 4 0 1 Ks, Roth IRAs, brokerage accounts, things of that nature. And then if you start accumulating wealth and you feel that you're going to exceed, those estate limits, then we should start thinking about. whole life policies or, variable life policies, things of that nature. let's talk about, comparison real quick and then we'll talk about, some other, scenarios where to consider each. Right? comparison term is obviously gonna be significantly cheaper again, often 10 to 15 times less than what you would pay for a whole life policy. term is going to be more, is going, going to be simple and more flexible. Whole life locks you in for lifetime premiums, and if you don't pay them and for whatever reason your policy elapses, you may have gains that you'll have to pay taxes on and things of that nature, or you just won't have the insurance anymore. and then the investment potential, obviously term lets you invest a difference. You don't actually have cash value in there. But I would say it's very safe to say based off the history of the market and what whole life policies will give you, you can get a higher return, through a well built. Portfolio. generally somewhere between, if you're in all equities, somewhere between seven and 10% year over year, or average. On average yearly. obviously this year's a little bit different because the market's pulling back, but if you look at a 15 or 20 year period on the s and p, again, seven to 10% doesn't seem, too difficult. Whereas a whole life is gonna be somewhere an average of three to 4%. On that money. to me, the tax benefits would not outweigh what you could get outside of that. so again, a quick cost comparison. A 40-year-old high income earner doing a$1 million whole life policy, would be about$12,000 a year, versus a term would be about$500,000 a year. if you invest a difference on that term,$11,500 a year at a 7%, Rate of return, you would have significantly higher cash value in that call brokerage account than you would in your whole life policy getting three or 4% right? And you're not even gonna invest the whole amount. You would have to pay a little bit of insurance there. insurance costs and fees and things of that nature inside of, the whole life policy. So term, again, the vast majority of the time is gonna make more sense for most individuals and families. While there are, some specific needs for, those ultra wealthy individuals that, whole life would make sense. again, whole life is going to be limit limited in specific scenarios. Estate planning, you want to guarantee a legacy. Maybe you have special needs. That's one thing I did not touch on. You have a special needs child that is going to depend on care. and maybe your assets aren't going to allow to get, allow that child to get the care that they need if you were to pass away. Well, if you want to guarantee that, that, that benefit is their whole life would make sense. another area that we did not touch, but if you're a business owner or you have, business succession plans, whether that's a kid buying your, a child, buying your business, or you have someone, That's a business partner, things of that nature. You may have a buy sell agreement that would make sense to have a whole life policy, because maybe you don't want the spouse of that, that business owner running and you wanna make sure that they're taken care of. And so you can fund that through some life insurance and sometimes, whole life would make sense. if you're a young physician or attorney, you're growing your family, you're making good, good money, generally term makes sense. invest the rest, start building that wealth, and hopefully by the time that term is up, you'll have, enough assets where, you are self-insured. But if you're, if you're, again, a wealthy business owner, you have estate planning needs and things of that nature, your whole life might make sense for you. So thanks for listening. This was short and sweet. I hope it was helpful. if you are, in the need for life insurance, you have questions about life insurance, you can always reach out to me. I do not sell life insurance. I'm licensed, but, I'm a fee only advisor. I can help you determine, what is the amount you need, what type of insurance you need, and I can get you in touch with the right people to help you that will take care of you and not try to sell you, some policy that you don't need or oversell you. for too much, insurance again that you would not need. feel free if you have questions about it, go to my website, palm valley wm.com. look at my process. I love working with people, that are those high income earners that need help with not only life insurance, but other facets of their life. Budgeting, investing. planning for retirement, whatever that may be. and like I said, if you have questions, specific questions about life insurance, we'd love to help you and get you in touch with the right person. And, we will continue on till next week. But again, if you like this podcast, go ahead and leave a five star review on your favorite podcasting app and share it with a friend. This podcast is meant to be for educational purposes only. It is not meant to be financial advice or investment advice, or insurance advice. Do not make decisions solely based on this podcast alone. Please seek an insurance or financial plan, insurance professional or financial professional when making decisions about your own situation.