Life Insurance Basics
What is "life insurance"?
Life insurance is a policy or contract, between a life insurance company and you, the insured, so that if anything happens to your health and you die, a beneficiary that you name on that policy is going to be paid a lump sum of money. It could be $100,000, it could be $1,000,000. It's one of the nicest products that I sell because it's a love letter ultimately between two people. "Honey, if anything happens to me, here's $100,000. You may not even need the insurance. You may marry a multi-millionaire the next time but this amount of money is what I want to provide for you because I love you." It's basically a love letter between two people. Not always the situation but many times it is.
Do I need life insurance?
You need life insurance if people depend on you. If, for example, your death would cause an economic loss for the family or for somebody else, you could conceivably need life insurance, even if you weren't married. As an example, you might have parents that you're supporting; you might have a brother who's ill and it's your sole income that's helping them with their life. So, people need life insurance if they can find that there's a debt of some sort between themselves and someone else. Even people that don't have that situation might consider purchasing term insurance, just because one day they might want life insurance and they may not be insurable.
How do I get life insurance?
The typical way to buy life insurance is through an agent. You meet with an agent and you decide on what you're trying to accomplish with that life insurance. You talk about what kinds of debts you have in you life. For example, you have a mortgage of $400,000, and you have kids that are planning to go to college - that's another couple of hundred thousand - and you have a spouse who might not be working. You want to cover that spouse to provide income for his or her life. You add these number up together and come up with a ball park number. You could never be 100 percent sure on how much life insurance you should have, but typically insurance companies issue anywhere from ten to twenty times your annual income. If a person is making $100,000, they could usually qualify for a $2,000,000 life insurance policy.
What is "term life insurance"?
What is "whole life insurance"?
Whole life insurance is a form of life insurance. It's a lot more expensive than term insurance because the insurance company says, "You pay a much higher premium than term insurance but we guarantee that this policy will be in force for your whole life, whether you live to 6, 8 or 11." The insurance company is guaranteeing that they're going to pay a death benefit no matter how long you live, so they come in with a much higher premium for whole life insurance. So, as an example, a $3 premium, as I suggested for a term policy for this 3-year-old person for a guaranteed premium for 2 years, might cost $3 a year for whole life insurance. The benefit of the policy is that in 25 or 30 years, the premium will still be $3 a year, whereas the term policy is now $8 or $9 a year. It's like owning a house. You can pay a mortgage and get your home payments over with after 3 years, or you can rent and be subject to the whims of a landlord who can ultimately kick you out of your house. Whole life insurange is really a long-term type of life insurance.
What is "universal life insurance"?
The other type of insurance that people are getting today is "universal life insurance". That's a hybrid between term insurance and whole life. It's term insurance with a bank account attached and the bank account at the insurance company earns a certain interest rate. Over time they hope that the premiums will stay level, but if the interest rate with this bank account isn't sufficient, it's possible you'll have to come in with a lot higher premiums at a later date.
How do I choose what type of life insurance is best for me?
There's various types of life insurance policies today. There's term-life insurance, which is a very popular type of insurance. It's very inexpensive – because it's just pure insurance – it insures you for 10, 15, 20 years, 30 years, and then it becomes really expensive, but a lot of people don't really care what happens 30 years down the road, they only care about the next 30 years. While their kids are young, or going to college. And, one the kids are grown or out of the household, and once the mortgage is paid off, they have a feeling that they won't even need life insurance. For people that have a more mature opinion or more mature view of life and say, I love my spouse and kids today and I'll probably love them forty years from now, and I don't want to have a life insurance policy that becomes so prohibitively expensive that I can't afford it. And, I'm willing to pay a higher premium now so that I don't have increasing premiums later on. So, a whole-life policy has premiums that stay level today and never, ever go up – guaranteed. Because I'm paying a much higher premium for that type of policy, the insurance company gives me some bonus points – number one, they give me cash values. The cash values in the policy can be used for loans, for emergency situations, they can if you want to surrender the policy after many years – you don't need the insurance. It's a windfall for some people. The other type of insurance that people are getting today is universal life. That's a hybrid between term insurance and whole life. It's term insurance with a bank account attached. And, the bank account at the insurance company earns a certain interest rate, and over time, they hope that the premiums will stay level – hope – they project that the premiums will stay level for a lifetime. But, if the interest rate of this bank account isn't sufficient, it's possible you'll have to come in with a lot higher premiums at a later date. So, you're hoping that the company will be profitable and will be able to maintain mortality expenses very well, and they might be able to give you a lower premium. So, when I have a client that wants life insurance for 10 or 15 or 20 years; term insurance is the best purchase. When I have somebody who says – I want life insurance guaranteed to be in force, even if I live to be 100; I usually recommend whole life. If I have a person that says – I want insurance that probably will be in force 20 or 30 years down the road, that person probably will be a purchaser of universal life insurance.
What is "variable life insurance", and what are its advantages and disadvantages?
A variable universal life is where the insurance companies have partnered up, so to speak, with various mutual fund managers like Fidelity, Franklin, Janus, Strong, and Neuberger, and they ask those fund managers to make funds available for their life insurance policyholders, and the insured is now able to invest the cash value, not into the surplus and the strength of the insurance company, but into outside mutual fund-like vehicles. If the insurance vehicles, and these funds do really well over time, the person could possibly earn a lot more return than a 4% return. The negative of variable life insurance is that, unfortunately, sometimes the stock market goes way down. If your cash values go from $40,000 to $20,000 in one week you will be very upset. So, a lot of people should not buy this kind of insurance if they don't understand the stock market. For a young person it's probably an OK product because you have many years for the stock market to probably do well. However, for somebody who's 70 or 80 this policy would probably be very uncomfortable, and probably would be almost unethical and illegal to sell it to them, because the insurance industry strictly regulates variable life insurance policies. They're worried that somebody who is 70 years old could have a downswing in the market and then the policy is lapsed, and the insurance company obviously will get hit with a lawsuit. The insurance companies are very careful on who they allow to buy this type of insurance.
I'm 25 years old. What kind of life insurance do I need and why?
Well the first question I'd ask you is "Are you married, or do you have any dependants?" If you said you have dependants, then you have somebody you love, and you want to protect them, so it'd be a nice thing to have life insurance. If you said, I don't have any of that, and I don't have children, and I don't have a husband. I would ask you the question "do you think you'll ever get married, and do you think you'll ever want to protect someone?" And if you said yes, then I would say that you might be interested in term insurance. It's very inexpensive, and it guarantees your insurability. You're healthy today, you may not be healthy tomorrow, and so five years down the road, you might say, "I want this insurance", but be uninsurable. So, it's not typical that a person who has no family or debt buys life insurance, but I can show a reason if you have an open mind for that.
I'm 40 years old. What kind of life insurance do I need and why?
If you say that you are trying to protect somebody in case of your death, yes, you need life insurance and you should get some. If you say "I don't have anyone dependent upon me", I might say then probably you don't need life insurance. A lot of people don't necessarily have a spouse or children to protect, but they might want to leave money for a charity. For example, even though you don't have children or a spouse, you may want to leave $100,000 to NYU or you want to leave $500,000 to the City of Hope. If this is the case then there is no reason why you couldn't buy life insurance for that and that would be a very altruistic reason to buy insurance. If later on, you decide you're married or you want to change the beneficiary of the policy, you can easily change the beneficiary of the policy to someone more suitable for you.
I'm 65 years old. What kind of life insurance do I need and why?
A lot of people who are 65 think that they don't need life insurance, but it's amazing almost every person that I meet that's 65 wants life insurance for some reason. They still love their spouse, they still love their kids. They still want to leave a significant gift to the charity. They might be fabulously wealthy, and don't need health insurance for the typical reason. Most people, when they think of life insurance they think of money that will help pay off the mortgage, or supply a certain amount of lifestyle to the spouse. But a lot of people who are fabulously wealthy, want life insurance to pay estate taxes. As an example, if you have a $1 million estate, your estate planning attorney will tell you that in today's world your children might have become $2 or $3 million to pay the estate taxes when mom and dad both die. The life insurance policy you buy might be able to pay for the estate taxes, leaving the bulk of your net worth to your kids. So as an example I have a client who has four apartment buildings. He's worked his whole life to finally amass a fortune, because his buildings are huge, they have a lot of units, and are worth millions and millions of dollars. He loves his kids, he wants his children to inherit a hundred percent of those buildings. Now, if he doesn't have life insurance, and his assets are mostly real estate, if he doesn't have life insurance his children will ultimately probably have to sell one or two of the buildings to pay for these taxes. So if a person says I want my kids to have all of what I have, then they need life insurance even at 65 or 85. If, on the other hand they say I don't care about my kids inheriting all this money, I didn't have any money when I started and I don't want to make them filthy rich and not work and they're not the type of kids that will appreciate it anyway, then I would have to agree with the client, because the agenda of the client comes first in my opinion. I would say you're a person that doesn't need life insurance because if you give all your estate away to charity, or you let the kids pay it then what's the point of having life insurance? So I'll be the first person to recommend not purchasing insurance and that scenario.
What is "business life insurance"?
Business life insurance has been around for years. Let's say that you have two partners, I had this very interesting case where I had two business partners. One was a famous dress designer, and his partner was the brains behind the finance part. Both of them worked together; the fashion designer was incredible. Very famous, and knew how to make the most beautiful clothes in the whole wide world, but knew nothing about business. The partner knew how to negotiate the advertising deals with the television stations, knew how to write up contracts, knew how to get loans from the banks. Together they worked in an incredible business. If the designer dies, the partner who was the brains behind the financial part might lose total value of the business. And conversely, if the fashion designer loses his partner who's the brains behind the financial part, the business could go down. So I sold business insurance on the fashion designer and on the financial manager of the business together. The insurance was put in force, millions of dollars of life insurance. Unfortunately the fashion designer died. The business is still intact today, doing well, and that cash that came from the life insurance policy was given to the business. The business manager took that money, and over the years was able to finally find people that could design in the style that the original fashion designer designed. And now the business is thriving and doing quite well. That's called "Key Man" or "Key Person Insurance."