Know The Differences Between Term and Whole Life Insurance
Ric Edelman: You know, there isn't a financial advisor in the country who hasn't seen a client's family devastated because the client died without having sufficient life insurance. You know, it isn't something that people like to talk about other than (sarcastically) the world of insurance. But there is no question it is undeniable the incredibly important role that life insurance plays in a comprehensive financial plan. To help us have this conversation, I'm happy to bring on to the program my good friend, Todd Hillstead. He's the executive director of financial planning at Edelman Financial Engines. Todd's got a degree from Brigham Young University and an MBA from the University of Utah, and he's been with EFE since 2011 over a decade. Todd, great to see you again, my friend.
Todd Hillstead: Great to be with you, too. Thanks, Ric.
Ric: So let's talk about life insurance. It isn't one of the most fun subjects to have a discussion with a client, is it?
Todd: No. I mean, there's a lot of stuff going on these days and there's a lot of stuff that we can spend our time worrying about. I always joke that there's always going to be an apocalypse du jour, and that can often take a lot of our time. However, a lot of the building blocks of creating wealth is also protecting those that you love. And it often requires sometimes a quiet conversation about life insurance.
Ric: So let's start there. Who needs it?
Todd: Well, think about anybody that would be financially impacted if something happened to you. So if there are children that rely on your income, spouses, partners, anyone that would be negatively, financially impacted should you pass away early - that's who needs life insurance. But often, you know, we think about our families. However, we often forget a lot of us run businesses and we have business partners. The other thing that we should be thinking is if I've got a key employee or a key person that's running my business, and if I was to lose them untimely, can my business still run? So we should also make sure that we are looking at the key people that we house under the roof of our business.
Ric: So it's really a short answer that you've given that is terrific. Is there an economic disruption that occurs as a result of somebody dying? And if the answer is yes, then you need insurance. It's really that simple. There are two different kinds of insurance policies out there, however, Todd. And this is where some of the complexity and confusion sets in for consumers. Term life versus whole life. Talk about the difference.
Todd: Term life covers you for a set amount of time. For example, if you have children that are going to be under your roof living with you for a certain period of time, and should something happen to you, where you need to make sure that they go through college, that they're still able to live in the home should something happen to them. But at some point I'm hoping, you know, the old joke was 'out the door by 24', but they actually are on their own and doing okay. And the risk that you need to cover might end. That's a great example of what term insurance may be, and it typically runs anywhere between 10, 15, 20, sometimes 30 years.
Ric: And as a contrast, there is whole life.
Todd: That's exactly it. It's your entire life. So you know that there's something going on that you need to have insurance for to take care of someone till the day that you die. And there's a few examples that come to mind when we talk about that. One is as you have a child or a member of your family that isn't going to be out the door by 24, you have a financial obligation, and you need to take care of them for your entire lifetime. I think of special needs children. Or we have a business that we need to cover someone longer than potentially 20 years and in a few extreme circumstances, for those that have accumulated a vast amount of wealth, life insurance can be used as an efficient means to cover some future tax liability, and that's often what this permanent type of insurance is used for.
Ric: So it's pretty easy to figure out whether you need term insurance or what you call temporary insurance as opposed to permanent insurance or whole life insurance. That's pretty simple and easy to understand. I think a more challenging question that people get into is, well, once we know what kind of policy, how much insurance do I need to buy?
What Happens To My Family If I Die?
Todd: And that's the million dollar question we often don't like to consider. Well, one, what's going to happen when I pass away? Or number two, what happens to my family financially? In 23 years of doing this, I've heard, every excuse like "I won't be around", to everything that you can imagine. The truth of the matter is, if you have a financial responsibility with those that are dependent upon you, I call it adulting. It is your job to make sure that those people are cared for. And the key thing to look at, there's an old adage when you look at the amount of insurance that you need. Let's take, for example, $1,000,000, drop the zero divide by two. That will tell you essentially how much money ballpark that insurance will spin off. So if you got $1,000,000 policy, drop the zero divide by two, it's going to spin you off about $50,000 per year. As you're listening to this, you may say, man, I may not have enough. My spouse or kids or whoever depends on me financially may not have enough money coming in from that life insurance. This is a great time to get a second opinion on your life insurance. One of the things that we often see, however, is that these opinions come from a commission-based salesperson. And often when I'm doing this, someone will come into our office, and they will have a permanent type of insurance, but they had a term type of need.
They had a need where they say, 'I don't need this really expensive insurance that's going to last a long time, or even 40 or 50, 60 years". It was only a 10- or 15-year need, but it was very, very expensive. And that's where you kind of want to get into the devil of the details. Is the person that is recommending the insurance a commission-based salesperson where they're trying to sell you a policy and they're actually making a commission off of that policy? Or is it someone that is coming from a fiduciary perspective where all they have to gain is to make sure that you are appropriately covered? And you want to be very careful that you are looking and working with someone who is a fiduciary, who has your best interest at heart, and they can recommend the appropriate and the right type of insurance that you'll need for either a term type of an existence - 10, 20, 30 years, or if you fall into one of those areas where it's a permanent type need and there are scenarios where it is correct to add a whole life or a different type of permanent insurance, just make sure that it's your best interest that are at heart, not the insurance agents.
Ric: What do you tell people who have an old policy they no longer need? What should they do with it?
Todd: Well, the first thing is do not just call the insurance company and cancel the policy. Continue to pay your premiums. Get a second opinion on that policy before you do anything. A quick example of what's happened is a lot of these types of insurance policies came into existence 10, 20, 30, 40 years ago. There are many things that can be done. You can take that cash value. In some cases, it is right to let the policy lapse. In some other situations, you can take that policy and lower the death benefit. You may say, my family doesn't necessarily need this money anymore, but I can still keep a little bit of this insurance, not lose all the money that I've put in. And we use it for philanthropy. We'll often put a charity of your choice as the beneficiary, as opposed to just losing all of that hard work. So be careful when you get those notices. It is often very frightening, it's very frustrating and I'm seeing them come quite common as these policies that were written years ago are now coming due. And we're finding that they didn't necessarily honor the original obligation that they were intended to do 20, 30, 40 years ago.
Ric: There are two other issues that pertain to the subject of life insurance. We're talking with Todd Hillstead, the executive director of financial planning at Edelman Financial Engines. One of them is the ownership of the policy. And that seems like a silly question because at first blush you would say to yourself, well, if I'm going to buy a policy to benefit my spouse and children, I should own the policy, shouldn't I? Well, should they, Todd?
Todd: Sometimes. Think about it. Whoever owns the policy calls the shots with the policy. Is someone else in control of that policy or the beneficiary of that policy, and they want to control it? We need to take care that those policies are set up correctly. If you don't have a fee based financial advisor that is working on your best interest, feel free to give us a call. We do this all the time. We are more than happy to help, and we can take a look at what's going on with your policy and give you some options in terms of how to set it up correctly or if it is correct to just give you a second opinion, pat on the back, say it's looking great. Keep on doing what you're doing.
Ric: That's Todd Hillstead, the executive director of financial planning at Edelman Financial Engines. And Todd, I'm really glad you invited folks to reach out to you and your colleagues. If somebody wanted to do that, how do they reach you?
Todd Hillstead: You know, there's two great ways to reach out to us. One is to pick up the phone and call 833-752-6333. Or the web - PlanEFE.com/Ric. And there's a link there to talk to a planner. And any one of our fiduciary fee-based planners would be more than happy to help.
Ric Edelman: That's Todd Hillstead of Edelman Financial Engines. Todd, thanks so much for joining us on the show.
Todd Hillstead: Always great to be with you, Ric.
Ric Edelman: And Todd and I spoke for a long time. If you want to watch, hear, or read the entire conversation, just visit TheTruthAYF.com.