March 25, 2023
Hey Everyone! Hope all is going well with all of you. I want to write about a topic that as you may know by now, is super important to me and really hits home. This is going to be on life insurance of course. If you haven’t already read my post about life insurance and why everyone needs it, definitely check that out. I tell personal stories about events that have happened in my life and how life insurance either was a saving grace or a giant detriment. I definitely think you’ll get some value out of that one.
In this post, I want to explore the two different types of life insurance that are out there. You hear a lot of things about life insurance and how important it is and what not, but how does it actually work? You may think okay, yes if I die then my family gets money. Well yes that is correct, but it can also be so much more! In fact I was sitting down with two clients (a husband and wife) about a month ago and was explaining the different types of life insurance that we offer. I was talking about cash value life insurance and she asked “so in this proposal you’re showing us, if something happens to one of us, the other is going to get not only the death benefit, but also any money in that separate account?” “Yes that’s correct” I replied. Then she said “well, okay then it’ll basically be reported to the IRS and our accountant will let me know what I’d have to pay in taxes for the next year right?” I told her “actually no, there are zero tax consequences with life insurance so your beneficiary will get the death benefit, the money in the separate cash account and not pay a dime to Uncle Sam.” Her response (which was absolutely priceless in my opinion) was “Holy shit, that’s wild! Done we’re doing this and I don’t know why everyone doesn’t do this!” Needless to say after that (she is the wife so we all know she makes the decisions) her and her husband purchased a policy to protect each other.
So on that note, what are the different types of life insurance out there? It can really be broken down into two categories: term life insurance and cash value life insurance. That’s it, pretty simple. There are several different types of term and cash value life policies but that’s a conversation for another day or to have with your agent. For the sake of simplicity, I’m going to break down what term and cash value life insurance are and the differences between the two. The easiest way to think about it, is the difference between renting a home vs owning a home.
Term Life insurance (Renting)
When you rent a home it’s pretty cut and dry right? You have your lease and you pay your rent each month. The benefit you get for paying your rent is a place to live. When renting a home, your lease is going to give you a specified period of time to live in that house. Whether it be a year, two years, month to month etc you have a specific time period stated in your lease. After that lease is up, you most likely will have the capability of continuing that lease or signing a new one for additional time. However you don’t build equity in that home, it’s not your asset and the rent checks don’t go anywhere except for the privilege of living there. It’s a roof over your head, end of story. Pretty cut and dry.
Term life insurance operates in the same way. You have your period of time, which is typically anywhere between 10 and 30 years. You pay your premiums each month for that life insurance. If you were to die, then your beneficiary gets a check (tax free) for the amount of coverage you have in place. When the term is up, then you have the ability to renew it annually but at a much higher premium, which is determined based on your age at that present moment. Like renting a home, your monthly premiums don’t build any equity or cash. It’s straight life insurance, you pay premiums, if you die then your beneficiary gets a check for the death benefit. Pretty cut and dry like renting a home.
Cash Value Life insurance (Owning)
When you buy a home it’s more expensive than when you just rented. You have other factors like property taxes, closing costs, higher insurance costs, maintenance expenses when things go wrong, etc. However, what’s the trade off? It’s YOUR home and it becomes an asset that you get to keep. You can build up equity in that home that you can borrow against or sell at a later date that puts money in your pocket.
Cash value life insurance works the same way. It is more expensive than term insurance. The reason is because your premiums go to two places. One is to pay for the life insurance itself, and the other goes into a separate account that is going to build up cash over time. It’s an asset that you get to keep and if funded properly, won’t expire like a term policy. The cash value will increase over time (again if funded properly) and you can use that money for whatever you’d like. We have clients that have used it for retirement, for a form of savings, for whatever you need. In fact I used money in my own cash value life insurance policy to help pay for a portion of my wedding! It’s great, I got a check and wasn’t taxed a dime.
So, which type is right for me?
When deciding on the type of life insurance that could be right for you, I always tell clients it depends on two things. Number one is what are you trying to accomplish by purchasing life insurance and number two is your budget. There are many variables when determining the right type of life insurance so I highly recommend talking to your local agent or setting up an appointment with us to start a conversation. Just like everyone has unique fingerprints, everyone has unique needs tor life insurance. It isn’t as cookie cutter as car or home insurance. We have clients that have only term, only cash value and others that have unique blends and combinations of both. Again it all depends on what you’re trying to accomplish by purchasing life insurance and what you can afford. The goal here is to just bring awareness for the different types. I will post future stuff and dive a little deeper on different types of term and cash value but for now I’d highly recommend talking to a professional to learn more.
Thank you all for taking the time to read and for the continued love and support. Remember we’re always here to help!