36 - Life Insurance Basics: Term vs. Whole

Life insurance can feel overwhelming, but it doesn't have to be. In this episode of "Making Sense of Your Cents," Daniel and Shanna strip away the jargon to explain the fundamental differences between Term and Whole life insurance. We break down who each policy is designed for, why Term is often the best fit for young families, and how Whole Life insurance fits into long-term legacy planning. Plus, we answer common listener questions about how much coverage you actually need and whether it’s possible to have both. Tune in for an actionable tip on how to calculate your family’s coverage needs, and gain the peace of mind that comes with a solid plan! 

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Transcript

Daniel Hill 0:02

Okay, Shanna. I think life insurance is one of those topics that everyone knows they should deal with. But it's so easy to push to the bottom of the to-do list.

Shanna Browning 0:17

Hi, that's me. That's me. I get it. It's not exactly the kind the fun, light conversation that people want to have over dinner like we had last week. It was a great conversation. So I'm with you.

Daniel Hill 0:31

It feels heavy. It feels serious. And honestly, Shanna, it's a bit intimidating.

Shanna Browning 0:39

It is. And we get scared of things that we don't really know a lot about, right? We just don't talk about it. So nobody likes to think about what happens if they're no longer able to take care of their family. But I have sat with people, customers, friends, family who had a plan in place. And the sheer peace of mind that it has given them and their spouses is truly just incomparable.

Daniel Hill 1:00

And if you think about it this way, think about it as the ultimate act of love. Yeah. It's not really about us, it's about the people who rely on us. But I think the part of the reason people avoid it is because the terminology sounds like a foreign language.

Shanna Browning 1:18

It's the worst. And we're we're in a financial industry business and it's the worst, right? So you're you're talking about between premiums, cash value, writers, death benefit. What does all that mean? And it's enough to make you just want to get up from the table and walk away.

Daniel Hill 1:36

Well, that's what we're gonna strip away today. We aren't here to use industry jargon. We're here to break down the two main ways you can protect your family, term and whole life insurance. Now, I want to say right at the top of this, we are not insurance people. No, we are not. We are not pros. Nope. But we do want to help maybe strip away some of the fear and some of the uncertainty. So I I want to encourage you, listen to our podcast, but then go talk to your insurance person. That's right. Go in armed with some of the things we're gonna talk about today and have a conversation with your insurance carrier about what are my options.

Shanna Browning 2:21

Yeah, and that's how we're coming to you today, right? We can talk about banking and financial all the time. We're just trying to give you enough to arm yourself, just like you said, and go have that conversation. So we're gonna talk about how term and whole insurance, how they work, why one's a better fit than the other for you than someone else, and how to think about that without feeling like you just need a large degree in finance of some kind.

Daniel Hill 2:43

Because you don't welcome back to making sense of your cents. I'm Daniel Hill.

Shanna Browning 2:59

And I'm Shanna Browning. And so today we're gonna take back that curtain again on life insurance. We talk about doing that a lot, but we're gonna break down the two most common types. And what we've said before is they are term and whole. So you can decide how to best protect your family's financial future, no matter what phase of life you're in.

Daniel Hill 3:19

And Shanna, let's start at the beginning with the why. When you strip everything away, what is life insurance actually trying to do?

Shanna Browning 3:32

Well, it's a contract, Daniel. I mean, it's just all it is. You pay the insurance company a set amount, your premium, and if you pass away while that contract is active, they're gonna pay a lump sum to your beneficiaries. Now, beneficiaries. Yes. Let's talk about that real quick. Um, beneficiary means who you're leaving that money to, right? That's a it's a big word. Yes. But it's basically who you're assigning that money to when you die. And that's all that is.

Daniel Hill 3:59

You can assign beneficiaries at different levels. That's right. Like, for instance, if I wanted to assign my wife as primary beneficiary at 100%, if something happens to me and she's still alive, she gets that 100%. And then you can do secondary, so like if I want to divide that between my kids, if my wife and I were both gone when that life insurance policy takes effect, then I could specify that that gets divided evenly between my children as well. So that's correct. There's multiple levels that you can have on that beneficiary um payout.

Shanna Browning 4:39

Yes. So great. I think that was great to talk about.

Daniel Hill 4:42

And and that's what they mean when they talk about death benefit. That's the money that goes to your family or your beneficiary.

Shanna Browning 4:51

Yes. And so that's the whole point. And that's where it becomes income replacement, right? Because you're gone, income is gone. So what's the income? So where are you gonna get money? So that's the income replacement. If you aren't here to bring home a paycheck, the money steps in to cover the big stuff, the mortgage, the groceries, the kids' college fund, whatever you sit down with your family and go over. That's what that does.

Daniel Hill 5:17

And I I think a lot of people feel like that's not something they need because they aren't wealthy. Um, is that something that you hear a lot?

Shanna Browning 5:27

All the time. All the time. People say, I don't have assets to protect to protect. So why do I need insurance?

Daniel Hill 5:36

And what do you tell them?

Shanna Browning 5:37

You're gonna love this answer. Um, I tell them, but if your family relies on you for your income to keep the lights on or you have a need, it's not about protecting wealth. It's about protecting your family's ability to stay in their home and eat. Oh, wow. And let me just tell you, I people always ask too in this realm of this conversation right here, people will say to me, Well, how much do you know how to get? I tell them, don't be worth a whole lot more dead than you are alive.

Daniel Hill 6:08

Oh, that's good. Right? That's good.

Shanna Browning 6:09

So every family situation is different. Yeah, you figure out what you need for your family if you die. If you die and you're and Shannon is not working, then what's that look like for y'all?

Daniel Hill 6:21

Yeah.

Shanna Browning 6:21

I die. Bart does work, right? So he's gonna have an income too.

Daniel Hill 6:26

Right.

Shanna Browning 6:27

Right. And Shannon does as well. But I'm just saying you've got to figure out what your scenario that is correct. That and that's just a good rule of thumb to look at. Do you need a million? I don't know. Maybe you do. I don't know.

Daniel Hill 6:39

So and and I think that's a great way to put it. Yeah, it's about keeping the quality of life as close to normal as possible during a worst-case scenario. So to your point, if if you're not worth five million dollars, why do you need it? Exactly. Exactly. Why do you need it?

Shanna Browning 7:00

Exactly. So I think it's a good question to ask.

Daniel Hill 7:02

So let's get into the two main types of life insurance. Shanna, explain term insurance like we're sitting in Chris's coffee shop, hanger 37, over a cup of coffee.

Shanna Browning 7:16

Deal. So I want you to think of term life like renting an apartment, right? You're buying protection for a specific time window. The term is going to be 10 years, 20 years, or 30 years.

Daniel Hill 7:31

And the price or the premium is locked into that time, right?

Shanna Browning 7:37

That is correct. And that's the beauty of it. It's very predictable. If you pass away during that term, your family is covered.

Daniel Hill 7:47

So let's say, let's say I'm 90 years old. I'm just throwing this out here because it's, you know, it's a good number. It's a random number. I got you. Let's say I'm 90 years old. I don't need a 30-year-term life insurance policy. Because quite frankly, the chances of me making another 30 years probably isn't gonna happen. Correct. But if I'm 40 years old, I might want to consider a 30 or even longer term policy.

Shanna Browning 8:20

Correct. Correct. If the term ends and I'm still here, and the kids are grown, then the policy just ends. I mean, it's just it just ends. You don't have to worry about it anymore. You've had the coverage during the years you needed the most.

Daniel Hill 8:41

And and that sounds almost too simple. Here's my next question. How expensive is it?

Shanna Browning 8:48

It's a good question. It's one to have, but it's actually not expensive. It's usually very affordable because that's what it is. It's a protector, and that's all it is. It's a pure protector. So no extra bill, or sorry, no extra bells, no extra whistles. That's why we love it for young families.

Daniel Hill 9:07

So for a family with young kids and a mortgage term is usually the go-to.

Shanna Browning 9:13

That is correct. 100%. You're right about that. You're getting the maximum amount of protection for the lowest cost during the years when your family is the most vulnerable. It's smart and it's a tactical move.

Daniel Hill 10:25

Now, what about the next one? Whole life insurance. That's the one everyone says is complicated.

Shanna Browning 10:32

And it is. It's definitely complex. So if term, going back to our scenario, if term is renting, okay, then whole life is like buying a house.

Daniel Hill 10:42

Way to put it on bankers' terms.

Shanna Browning 10:44

That's right. That's the way we are. It is designed to last your entire life as long as you're paying the premiums. You gotta pay them, right? And since it's permanent, it costs more. Big more. Much more. Yep. Um, but there's there's a big trade-off. It builds whole life, builds cash value, which is one of the words we talked about. That's you know, this big fancy word or term of it builds cash value.

Daniel Hill 11:14

So explain cash value. Is that like a savings account inside the policy?

Shanna Browning 11:19

Kind of it is, yes. But a portion of your payment, or excuse me, a portion of your premium is set aside and it's invested by the insurance company because they do that too. So there's there's a part of it that's invested by the insurance company. So it grows inside that policy over time.

Daniel Hill 11:37

Can I use that money?

Shanna Browning 11:38

Sometimes you can borrow against it, or if you surrender the policy later in life, you might get some of that value back. But Daniel, we're gonna be very clear here. It's not a high growth investment account. Okay. We're not talking like a 401k, we're not talking like uh stocks, we're not, we're not there.

Daniel Hill 12:01

It's not something you can retire on.

Shanna Browning 12:03

No, it is not a high growth investment account.

Daniel Hill 12:06

So then why would someone choose whole over term?

Shanna Browning 12:13

Well, long-term goals, right? So let's think about that. It's specific long-term goals. Maybe someone wants to leave a guaranteed inheritance, what I just said a little bit ago, or they have a lifelong financial obligation to that. Or a child with special needs, it's a tool for permanence and it's your family scenario. That's what you have to look at.

Daniel Hill 12:36

That that makes sense. And that's why that's why we encourage you to take the information we're giving you and go talk to an insurance professional. Yes. This hopefully will allow you to talk more intelligently with them and ask questions and maybe get answers back and not have to worry about them explaining cash value or death benefit or some of these other things. Um Shanna, we do get a lot of questions about this. And people hear conflicting things, you know, social media, you get all kinds of stories there. What's one of the biggest questions you see?

Shanna Browning 13:15

All the time. Can I have both? Yes, you can. You don't have to choose just one. Many people start with a big term policy when their kids are young to protect their income, and then later in life, they might add a similar whole policy for legacy goals.

Daniel Hill 13:35

That does make sense. It's like having a big umbrella when it's raining, then keeping a smaller permanent one just in case for later on.

Shanna Browning 13:43

That is a perfect analogy, Daniel. Perfect. So here's another one we get. How much coverage do I actually need? So we we talked about that a little bit.

Daniel Hill 13:54

You know, don't insure yourself for more than you're worth. Right. Um, I tell people to look at their income replacement. If you make 60,000 a year, look at what that would take for your family to live for 10 years without your income.

Shanna Browning 14:14

Yep. Yep. And I, oh, that's just that whole scenario right there, that whole sentence by you is so important. But it's a because it's a gut check number, right? We all know we're ain't gonna be here forever. Yeah. So we got to figure it out, right? So it's a gut check number. And it's not an exact science.

Daniel Hill 14:31

No.

Shanna Browning 14:32

But what we're doing for you today is getting that conversation started.

Daniel Hill 14:37

Exactly. Exactly. We just want you to be thinking about the what ifs.

Shanna Browning 14:44

And don't be embarrassed. We talk about that a lot, right? Scams, fraud. You know, people don't talk about things because they've done something or they're embarrassed that they've done something. Do not be embarrassed. This is your life. Exactly. This is your kids, your your family life. That's important. So do not be embarrassed about go in there and tell them. If they start talking cash value, if your insurance agent starts talking about cash value, death benefits, stop them and tell them, I'm gonna need you to come down a little bit on those terms.

Daniel Hill 15:13

Yes, yes.

Shanna Browning 15:14

I expect you to do me that way in banking. Yes, right? When we have those conversations. If I'm if I'm talking words you're not even familiar with, stop me and tell me. And that's what this is right here.

Daniel Hill 15:26

That's and and that's the whole mission and purpose behind why we started this podcast is to answer the questions that maybe you're afraid or don't even know to ask.

Shanna Browning 15:38

Yes, I love it. I love it.

Daniel Hill 15:40

So this has been a very heavy conversation. And it can always be. Very vital. So let's get everyone to their actionable tip for this week.

Shanna Browning 15:52

All right, let's do it. It's called the coverage calculator.

Daniel Hill 15:58

So, what we want you to do is go to a reputable insurance calculator, life insurance calculator this week. You can probably find them online. Your insurance company may have one.

Shanna Browning 16:10

Yeah.

Daniel Hill 16:10

Um, or or call up your insurance carrier and just say, hey, I've got some questions. Um, put in your current income, your major debts, and how many years you want your family to be covered.

Shanna Browning 16:24

I mean, it's really that easy, right? We do it with car payments. Absolutely. We do it with house payments. You can do it the same way with this. It's a rough estimate. It's just a rough estimate, but you're seeing those numbers in black and white. If it's your visual and what your family would need if your income was gone, and sometimes very suddenly. So it's the best way to get serious about your protection plan. So, you know, Daniel, life insurance really isn't the easiest thing to talk about, right? But it feels like I feel like we've clarified a lot of that today. And it's not about the what-ifs, it's really about the will bees. Right. Because this is gonna happen. So making sure that plan is there for your family stays secure when you're not here.

Daniel Hill 17:08

Exactly. And you know, it's one of the big foundational pieces of your financial home. Once you've got it in place, you don't have to worry about it every single day. You just know it's there and working for you.

Shanna Browning 17:22

And that's the best way to put it, right? So now for next week, we're gonna shift gears a little bit from long-term protection to present-day progress. We're gonna do a mid-year financial review the halfway mark.

Daniel Hill 17:34

Yes, June is the perfect time to look at those goals that we set back in January. We're gonna help you figure out what's working, what needs a tweak, and how to finish the year stronger than you started.

Shanna Browning 17:49

And you know we're gonna tell you, make sure you're subscribed and that you don't miss the mid-year check-in.

Daniel Hill 17:55

We appreciate you trusting us with your financial questions. We'll see you back here next Tuesday.

Shanna Browning 18:01

And until then, keep making sense of your cents.