Today, we’re going to be diving into life insurance.
I’m going to talk about the different types, help you figure out how to calculate how much you should have, and give you some boundaries on what life insurance is and isn’t. And hopefully, it will be beneficial to you.
But for those of you who don’t know me, my name is Tremaine Wills. I am a Certified Financial Education Instructor. The owner of Mind Over Money which is a registered investment advisory firm, where we help ambitious black women, entrepreneurs, and just general go-getters create the perfect financial plan and begin their investment journey. So that eventually they can retire and leave this crazy hustle.
We do that using our R.I.C.H. Roadmap, which is our framework for helping you create a custom financial plan.
Within that, of course, all these key components go into it.
Of course, we focus on investing, but life insurance is a key part of any comprehensive financial strategy. So as we’re talking about building wealth, we can’t leave out ensuring that we have some sort of wealth transfer and asset protection in our portfolio.
I want to dive into what life insurance is today and make sure that those of you who are reading this blog post have a clear understanding of why you need it.
Everybody Needs Life Insurance. The Cheap Kind Is Fine. Let’s Argue.”
Because there are lots of people who will try to tell you that you got to have permanent insurance.
That’s the only way and I’m here to tell you, as somebody who is a licensed insurance agent, everybody does not need a permanent policy. And for many people, the way that it’s being pushed on you is predatory.
So I want to talk through things to look out for, how to know what type of insurance you should get if you are over and underinsured, and what we’re going to do about it.
Before I get to the meat of this content, I do want to invite everybody to my 14-day free trial. I have an online learning community that goes into deeper detail about how you can create your own financial plan, get a budget in place that works, debt payoff strategy, and the basics of beginning to invest.
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But as we’re talking about life insurance, one of the first things I want to say to you is that life insurance is not an investment. So no matter how many times you might hear somebody say, you know, the cash value of your policy can grow. Yes, it can. But the purpose of life insurance is to serve as life insurance.
The most basic premise of it is to provide a death benefit when you pass away. So yes, there are instances in which life insurance could be used as an investment. But life insurance itself is not an investment.
So I want us to lay the foundation here that as we’re talking about this particular product, that is not something you should go into with this idea that I’m going to invest this money in this life insurance policy, and I’m anticipating a huge return.
The first and primary reason why we get life insurance is to provide us with a death benefit for somebody else to use.
There are ways to structure policies and policies that you can use while you are living. Yes, that is the case. But the primary purpose of life insurance is to give us a death benefit so that we can use it for wealth transfer, pay off debt, and income replacement.
So as you are having conversations, and as more people start to talk about life insurance, I want us to be clear on what this thing is so that we’re not led astray by different agendas.
There are two types of life insurance, you have your permanent policies, and you have temporary policies. So if you’ve heard about term policies, these are the ones that last for a specific period of time.
And for most people, when you’re just getting started, and you don’t have a huge budget, that’s where most of us should be starting. And that’s perfectly okay.
There are also instances in which you’re bringing in lots of money, and you don’t have any dependents. It might not make sense for you to have all of these different permanent policies in place. And so sometimes term policies are the answer.
But at the bare minimum, I believe that everybody should have some sort of life insurance policy in place, even if it’s just to cover your final expenses.
75% of people have a policy, but for most of us, it’s a policy that’s offered through our employer. And so if we were to ever leave that job, we would lose our benefits.
So if you don’t have some sort of policy outside of the place where you work, I encourage you to start to look around to see, “Okay, where can I get just basic coverage? So if I leave my employer, I am not in a position where I have a gap in my insurance coverage.”
And so if you have more questions about that, I definitely encourage you to join the membership. I’ll go into deeper detail if you need more than what we talked about.
But bare minimum, everybody should have some sort of life insurance policy in place, ideally, outside of your employer, you don’t have to spend a ton of money to get that basic plan in place that basic insurance policy in place.
So how do you know how much life insurance you should have? There’s a formula called the DIME method that teaches us how much insurance coverage we should have, there are some things to take into consideration.
One of those should be “Do I have dependents?
So if there are people who are depending on my income, there is a higher threshold for how much insurance I should have.
And for those of us that may not have any dependents, nobody’s going to be missing the income. If we stop bringing it in, then I don’t need as much as others. But the DIME calculation helps you identify, “Okay, well, how do I fill in those gaps?” So remember DIME, D-I-M-E.
The “D” stands for debt. So what I want to do is I want to have enough insurance coverage so that in my passing, there’s enough death benefit and it covers the balance of anything that does not disappear when I pass away so that my estate is not responsible for any debt. If I have personal credit cards, or things that are not going to get discharged, when I pass away, then I want to make sure that I have enough life insurance coverage so that when that money is paid out, it can be covered by that death benefit in my estate that doesn’t owe money.
So that’s what the “D” is for covering all of my debts.
Then you have the “I”, this is for income replacement.
Now, this is the one where if I have people depending on my income, I want to make sure that they get that income replaced, at least for the next 10 years.
So you’re going to take however much income you make, let’s say it’s $50,000. The calculation calls for you to multiply that by 10. And then that’s how much you need to have in coverage.
For example, if I make $50,000, I want to have $500,000 of life insurance coverage so that my dependents, anybody counting on my income, can at least have some sort of normalcy as much as possible, right? Especially, In my absence so that they don’t have to worry about money.
For many of us, when we experience the loss of a loved one, not only are we overcome with the grief of losing them, but now, we also take on the financial burden of “Oh, my goodness, how do I replace the income they were coming in with? Or how do I cover the bills that they were responsible for so that we don’t lose either our standard of living or so that we don’t lose the assets that may not be completely paid off.”
So like you might have heard that there’s a home in the family where the mortgage has been paid off. And that’s a separate calculation, but I’m just giving an example. But because there is income coming in, we can’t continue to cover the notes or things like that on that asset, and then you have to sell it.
And so we don’t want that to happen. We want to make sure that people who are depending on our income, in our absence, don’t have to grieve twice. They don’t have to grieve for the loss of us, and then for the loss of the lifestyle they were able to afford, because we were here.
So that “I” is key, if there’s anybody who is counting on your income, you want to make sure that you have enough insurance coverage, so that they can at least get some for a few years after you pass away. That’s what the “I” is.
The “M” is to cover the cost of any mortgages.
So if you own a home, and it is not completely paid off, you want to make sure that you have enough insurance coverage so that that mortgage can be paid off. And whoever receives the home doesn’t have to worry about taking on that note, especially if there’s somebody who wasn’t living in the house, they might have a mortgage note of their own.
So having enough coverage so that if there’s $200,000 left on the mortgage, the death benefit can help pay that off. And there are lots of different ways to structure this because I know these numbers are starting to add up, right?
We said $500,000 and now we’re talking about a $200,000 mortgage note, so it’s getting up there. But I’m going to show you how you can structure this. So it’s not intimidating.
And then finally the “E” is for education.
So if there’s anybody that you want to put through school. And I like to not just leave this for education, because many of us, might be deciding that we want to just give a particular dollar amount. So that they can go off and start a business or follow a passion or whatever the case is.
But you want to leave some money behind so that there is a nest egg to launch from so that they don’t have to start over from zero.
So many of us have this grit and this hustle because we’re starting from zero all over again. And for people who do wealth planning, they’re not making the next generation start over from zero. And so if you want to put those coming behind you in a better position, that “E” is that calculation.
“Well, how much do I want to leave behind and be able to give so that after the assets are paid off, and you know, they don’t have to worry about the lifestyle, my debts are paid off, they can use this bucket of money to launch into the next phase.” And they don’t have to hustle the same way and grind the same way that you did.
So that’s what that “E” is for.
So let’s recap.
The “D” is making sure I have enough coverage to pay off any debts that I have that are not going to be canceled when I pass away.
The “I” is for income replacement. If there are people who are depending on my income, I want to make sure I have 10 times that amount and death benefit.
The “M” is to cover the value of any outstanding mortgage notes I have.
And then the “E” is to provide that launch path that lump sum to anybody I want to put through school or give them resources so that they’re not starting from zero, right?
So if you’re looking at it, you might easily say “Okay, well, that’s a million dollars right there. How expensive does this have to be?”
So if I am younger, who is in better health, I can get term policies, rather inexpensive, right? So this is why I say like, it doesn’t have to be the permanent policy. You don’t need a million-dollar permanent policy.
For many of us, the cost of insurance will eat up any discretionary income that we have and impact our current lifestyle. But if I’m in decent health and I can qualify for, you know, a million-dollar policy and it only costs me 50 bucks a month. That’s definitely something worth going after, right?
And so, one of the things I like to encourage people to do is if you have a mortgage, get a decreasing term policy, that’s in alignment with the value of that mortgage going down.
So most mortgages are for 30 years. And so what I can do is I can get a decreasing term policy, that’s the same value as the mortgage. And then that way, by the time the mortgage is paid off, that policy will also be done, and there’ll no longer be a need for it.
So there are lots of different ways that you can structure your ability to put together life insurance packages so that they do exactly what you need. And it doesn’t have to be everything is whole life, right, or everything is a permanent policy.
Permanent policies are more expensive, they have more hidden fees inside of them. And so it can get to a place where it’s eaten up a lot of your budget, there are instances in which it makes sense for us to have permanent policies.
But for those of us who are just beginning this journey, and may not have lots of money to get started, the term is absolutely okay.
So if you don’t hear anything else I say tonight, it’s okay to start with a term and not have a permanent policy, as you’re getting started on this journey.
Now, one day you might graduate and realize, “Okay, I do want to use the cash value in my permanent policy. I have a structure that I’m putting together from my financial plan where it makes sense for me to start to build cash value.”
But for the vast majority of us, when we are just starting on this journey, the basics, the very simple, hey, this thing is in place for 30 years, right? And at any point, I can upgrade, and get a different type of insurance policy.
But when I get started, I don’t have to go for the whole shebang all at once.
“I can start with the coverage that I need at the term policy level, where it’s more economical for me.”
So hopefully, that is helpful.
So now some things to consider when we’re looking at our insurance policies.
The cost of insurance contains lots of different fees and expenses.
So when you’re looking at if it is a smart investment to make, if it’s something that I should be doing, we want to compare apples to apples. There are so many different fees baked into your insurance policy that I want us to be aware of.
So, of course, the first one we have is the cost of insurance. This is the one where it’s based on our age, our gender, our health, and how much the death benefit is. The older I am, the more unhealthy I am, and the more that death benefit, the higher the cost of insurance is going to be.
So one of the things that are on your side is your youth. And if you are somebody who maintains excellent health, you exercise and you know, you live a pretty boring life, use those things to your advantage.
Because some lifestyles are more expensive, right? If I’m a pilot, or if I like skydiving or bungee jumping, cliff diving, those types of things, my policy’s gonna be more expensive.
But if you are in great health, you’re young, you exercise, and you don’t have any major health conditions, you want to look at getting insurance now because it’s going to be less expensive. Because your lifestyle is better. As we age, no matter what insurance gets more expensive.
So this is not something that you want to keep putting off, keep putting off, keep putting off, because you wait five years, and the cost to get covered goes up significantly, year after year.
So if you’re reading this, and you don’t have insurance coverage, this is something I encourage you to take care of within the next 30 days.
Because it can make the difference between, you know, something costing a couple, maybe, you know, 30, 40 bucks, and then you wait five years, and now it’s like double the price.
So take advantage of it now while you are thinking about it, because no matter what, it’s gonna get more expensive as we age.
Another thing is the surrender charge.
So as you’re thinking about, “Okay, maybe I do want to purchase a permanent policy, if I don’t keep that money inside of that vehicle long enough, I have to pay more fees for taking it out early.
And so that’s one of the reasons why when you’re looking at different insurance policies and how you can use them, you have to be very, very aware of what the rules are around it, and what the costs are associated.
Because the surrender period might be seven years, I have to leave this money here. But if I don’t know that I have to leave it in seven years and I take it out early, I’m going to lose a percentage of the cash value, and I can’t do what I thought I was going to be able to do with it.
Because sometimes we’ll use the cash value to invest in a business or to help supplement our retirement income. There are lots of different things you can do. But you have to know how your policy works and understand the fees associated and the rules around it so that you don’t shoot yourself in the foot and get charged extra money because you didn’t use it appropriately.
So if you are looking for something to supplement the way you manage your money then permanent insurance can be something that helps. But you want to be very, very aware of how it works so that you don’t incur additional fees that negatively impact what you thought you were going to be able to do with that money.
And the surrender charge is something that can hurt you, if you’re not aware that, “Oh, I had to leave this money in here for seven years, I thought I was gonna be able to get it in five.” “No, ma’am.”
You have to read those policies in depth so that you know how they’re working.
Then you also have the premium load or the sales charge. So of course, the people like me who sell you this policy, we have to get paid. So even though you may not pay the agent out of your pocket, they’re still getting paid.
And that comes from the premium load and the sales charge. And so this is another baked-in fee that comes out of your premium payment.
There’s also the mortality and expense risk charge.
So let’s say you purchase a life insurance policy, and you don’t live as long as the insurance company expected you to live.
Well, every month, they’re taking a little chunk out of your premium payment, just in case you die early.
So there are so many different ways to chop this up, where it doesn’t matter what happens, this is a reason why life insurance companies are profitable. Because they have lots of people that are being covered, and everybody’s paying just a little bit right into their big bucket of money.
So if you die too soon, and they do have to pay out that death benefits sooner than they believed, they’ve been collecting money all along. And that’s what that mortality and expense risk charges for.
And then there are, of course, the administration fees.
So there’s a fee for everything, y’all!
And this is the cost of the recordkeeping and the accounting that is associated with your insurance policy.
And then you have your fund management fees. So if you’ve ever been pitched to purchase life insurance as an investment, there are funds inside of that cash value that has to be managed, and the person managing them gets paid.
And so you want to be aware of all of the different fees that are inside of this policy. So when it’s time to make a decision, you can make a decision based on all the information.
So it’s critical that you know, it’s not just the premium that I’m paying, but what is coming out of that premium before it’s left inside of that cash value.
So that I know, I might put $50 in this thing, but that doesn’t mean $50 is gonna grow every month. Because I have to pay the cost of insurance, I have to pay administration fees, I have to pay fund management fees, I have to pay mortality, and expense risk fees.
So there are so many different fees that add up that eat away from that return you might expect.
So I know this was a lot.
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