Life Insurance in Your 50s: Do You Have the Right Kind?

Welcome into Phil's tax hacks and other retirement facts with CPA and personal financial specialist Phil Putney.

Now let's get rolling with today's show.

Term, whole, universal, Phil.

What do we do with the options of life insurance?

Not nearly as sexy as last week's conversation about AI, I realize that.

But life insurance is an important piece of the retirement puzzle, right?

Part of life, yeah, absolutely.

Part of life, there you go.

So let's talk about it this week.

We got a great question from a listener.

They wrote in, what's better, right?

Term life, universal whole life, which I'm sure you've probably been asked like eight million times.

So let's talk about that, especially if we're, you know, 50 plus, right?

So we'll kind of dive into all three a little bit and break them down.

You doing good this week, by the way?

Doing good.

Yep.

Love and spring.

It's on the way.

There you go.

I'm sure it was the eight million times in your career.

Have you been asked this question?

Maybe not quite that many, but a lot.

Maybe not quite eight million.

But yeah, it gets brought up.

It gets, I definitely brought up a lot.

And I mean, the thing that gets brought up more often than what type is that,

I really don't need it.

Do I even need it?

Yeah, yeah.

That's great point too.

Yeah.

All right, well, let's start.

So when a client is in their 50s and has term coverage, what's the first question

that like you would ask them about?

So they come in first time and you're looking through their stuff.

You got their collection of items, you're starting to break it down a little bit

and they got term coverage.

What are you asking them?

Well, usually it's, well, what was the thought behind it?

And generally it's because, okay, I, you know, early in my career

and I had kids that I needed to make sure that, you know,

if I passed away, there was funds there for college or we had a mortgage

or, you know, so term usually is tied to some life-specific event

that has a time frame.

So what are you still protecting kind of thing, right?

Right, and that's really where term fits in.

I always like to think of life insurance in two fashions.

It's like, you know, renting or owning, right?

And so term is you're renting the insurance.

You're renting it for 10, 15, 25 years, whatever the term is.

Right, yeah.

At the end of that term, it's gone.

You know, and that's really the challenge with that term policy is that

day one, after the term, it has no value.

It is peer insurance.

So it's a good cost-effective tool for a very known need

that's going to end at a specific time.

That's it.

You know, so a lot of times it works really well for that

because you're not paying any additional cost to have this type of policy.

It's just peer buying the insurance.

It's only for this period of time and it's going to end.

If the pass event that when it's going to end time frame is a little bit unknown,

well, then term isn't such a great thing.

Okay.

All right.

So whole.

So I said we're going to talk about all three for a minute, right?

So whole life gets a lot of praise and a lot of criticism, right?

So what's your honest take on it?

So when we get into, so there's term and there's what I reference

as permanent insurance.

So permanent whole life is a type of permanent insurance.

And permanent insurance simply means that there's a cash value involved with it.

So it's not just, I'm paying a premium for a coverage.

Like, you know, your home or auto, which is term whole life.

Now you're paying a premium.

It's a fixed premium in the insurance company is going to guarantee a minimum interest rate.

And it could go higher than that based on their experience, right?

Because you're basically investing with the insurance company.

So your return is based on their investment portfolio.

If you want to think about much like the concept of a bank, right?

You're putting your money in the bank.

The rate they're going to pay you has a lot to do with market rates based on bonds

because that's where they're investing a large majority of their portfolio.

Gotcha.

Same kind of a concept of an insurance company, right?

So, but it's a fixed rate, right?

So there's more guarantee kind of strict rigidity.

You know, you understand, hey, here's the premium I have to pay for what period of time.

You know, and here's the interest rate at a minimum I'm going to get.

I might get a little bit more, but it's not going to be much more.

So it's a, it can be a great tool again for that time frame that I know I need coverage.

But I don't know exactly when or how, you know, what that's going to look like at the end.

It's typically an extended period of time.

Yeah.

And typically it does come with a higher cost, right?

Overterm, right?

So sometimes that turns people away from it or whatever.

And then there's the cash value, obviously, you know, peace in that.

Is that where it's oversold maybe?

Is people saying like the the bank of me?

Yeah, so there's a lot of uses for term or for permanent type insurance.

You know, whether it's whole life or we'll get into universal in a minute.

And, and kind of, you know, yeah, the building the cash value.

Yeah.

And there's pros and cons.

At the end of the day, it's a tool.

Understand how it works.

It does, I think, get oversold quite a bit.

But just understand how it works and in what place it might fit.

Because the advantage you can gain with this whole type of policy or permanent type of policy is that cash value

potentially can come back to you tax-free.

Right.

And there are some ways to use it.

But just it's like anything, right?

It's not, oh, this is the latest, you know, greatest things in sliced bread.

Everything you invest should be in this.

No, not at all.

I mean, is it a tool?

Does it have these features and benefits?

Yeah.

I'll understand what it is.

And hopefully the advisor you're working with, this isn't the only thing they sell.

You know, so to me, that would be a red flag when you're looking at it is if the advisor that is recommending this product to you is only insurance licensed.

Right.

Okay.

Well, they have a limited tool.

They have limited tools in the tool bag.

They understand that's the only tool in their tool bag.

So, of course, it's going to be the right fit.

And they should, you know, they're going to recommend you put a lot of money there because that's what they got.

Right.

Not to say they're bad.

It's just that's their approach.

You know, my approach is going to be a much more holistic approach.

We're looking at it in a different fashion.

We use permanent policies all the time.

If it fits, if it solves the solution, we're trying to solve for the clients.

Okay.

All right.

So then you're universal.

You mentioned universal.

So, it promises flexibility.

Is it a feature or a trap?

Both.

So, I mean, it does give you, so the reality is it gives you flexibility.

Right.

So, with a whole policy, you have to pay the premium.

Right.

So, you're locked into this.

With a universal policy, you don't.

Right.

I mean, yeah, there's a planned premium.

You, they're designed with a certain level of premium over a certain period of time.

Universal policies because the investments aren't based on what the insurance company is doing.

So, they're not guaranteeing the rate.

The investments are outside of the insurance companies.

And there's a couple of different ways that could be invested.

They could be indexed where you get some upside of the market, but not anywhere near all of it.

You know, but you're protected from downside.

That's an index policy or it could be a variable policy where you're in the market.

But at the end of the day, the investment performance isn't guaranteed by the insurance company.

Yeah.

So, and this is the trap, right?

Because a lot of times I think the universal policies get over illustrated.

You know, they like to illustrate, oh, this is, you know, historically it's done a, you know, 15% return.

Right.

Get the protection.

And this is, right.

So, you can put in, you know, this amount of premium over this many years and you're going to be able to stop paying because it's going to have this cash value and, you know, et cetera, et cetera.

It's like any investment.

We don't know for sure what that's going to be.

So, you have to just monitor it as the key.

And that's really with, with any of these permanent, any life insurance, monitor and understand it year or year.

Is it where we need to be today?

It's not a, you know, I bought it 10 years ago and haven't looked at it.

Well, that's a problem.

You know, look at it every year and understand it's just the universal gives you that flexibility that, hey, if you've, you know, supposed to put in,

throw a number out there, 15,000 a year for the next 10 years to make this work.

But it's been a great market more than what we anticipated.

Well, you might be able to stop early or it might actually grow to a bigger cash value and a bigger death benefit that what was planned.

And that's really the key is the universal just gives you more flexibility now.

Well, because now we can make some adjustments and we can stop premium or we can reduce that benefit.

I mean, there's a lot of different things you can do with it where you get into the whole life.

It's a little bit more rigid in what it is.

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Well, so you know, those are the three, you know, kind of breakdowns there.

But you also said the other piece of that is, do I need it at all, right?

So I guess big question for people in their 50s, do they still need or above?

Do they still need life insurance at all?

So what are some things to think about?

Again, I guess you probably start with what is the problem you're trying to solve with it?

Right. So I mean, the start of it with any of our clients is we're running through a scenario to say,

okay, if you both live to full life expectancy, let's make the plan work.

And we have to make some obvious assumptions on what life expectancy should have been.

But then we always run scenarios to say, okay, what happens if that doesn't happen, right?

And we'll go through and say, okay, what happens if, you know, the spouse or the client passes away today, five years, 10 years, 15 years down the road,

and model that out to see, is there a need for life insurance?

Because at the end of the day, life insurance general concept is to replace income.

You know, I'm gone, don't have the income anywhere.

Well, in retirement, you've hopefully converted a lot of your, you know, life equity into actual cash invested equity

that that passes on beyond you.

But there is still some income, so to speak, that you're generating.

You could do that for your pensions.

You could do that for your spouse, though, too, though.

You could do that too.

Yeah.

Yeah, same thing for the spouse.

So understand if they pass away.

Yeah.

You know, the other thing to understand is when those happens is, when we talked about this before, that change in the taxes going from married filing joint to single.

So the key with all of it is you have to model it out, right?

And look at the scenario and look at the real numbers to say, if this were to happen today, this is what would happen.

This income would happen.

You know, we're going to lose this so security benefit.

These are the tax rates.

Model that out.

Does this surviving spouse still have enough based on those scenarios to make it through their life expectancy?

Okay.

You know, and if that's the case, yeah, then maybe you really don't need life insurance.

But then some people like to use life insurance as well, just a replacement in case, right?

Or even like I want to build an inheritance to the kids.

I mean, it could be a great tool for that because, again, depending on the type of policy,

I mean, you can fund it and have this guaranteed death benefit till X amount, you know, to whatever age 110, let's say.

So you're guaranteeing that, hey, I'm going to leave the kids 300,000.

That's my goal.

So you could try to save and kind of earmark some of your investments for that.

Or you could buy a life insurance policy that's going to absolutely pay that.

Yeah.

So there's a lot of uses for it.

Another use that is relatively new is this whole concept of having some kind of a long-term care or chronic illness right or attached to it.

So now these more permanent policies can almost serve as kind of two tools.

It can give you that death benefit that if something happens where you passed away, well, there's a death benefit.

But if not, if instead you're not able to perform the two out of six activities, activities of daily living,

you know, the whole long-term care concept, well, maybe I can now use that death benefit instead for chronic illness.

Right.

And that's making I'm very popular.

So there's a lot of different uses of it.

So don't, I guess, don't get caught up in the, oh, it's life insurance.

I don't need it.

You know, or absolutely need it.

Understand what it is.

It's a tool.

Run your plan first and then your plan should never be the product.

Right.

Your plan should be the plan.

And once you've understand your plan and you've mapped that out and it's an insurance product, right?

So generally comes into play when we're trying to hedge against the risks, the stress test in a plan.

Well, so at the end of the day, the right type of life insurance is the one that solves a specific problem, right?

So it solves a problem and maybe it does have some other benefits.

So don't buy the, you know, the features at the end of the day we're trying to buy that benefit that it gives you at the end.

And it's specific stages.

It does change a bit.

So a 55 year old problem is different than a 35 year old problem.

So just make, yeah, just make sure that your coverage has the right things or, you know, that you need for the situation that you're in.

And yeah, it's not always the sexiest of conversations, but it is a, it can be an effective tool in a good piece of the puzzle, you know, for the right situation.

So again, you need help with it as always.

Make sure you're talking with a qualified professional in your area or reach out to somebody like Phil.

I mean, you know, he's, he helps people in all, you know, not just Michigan.

He helps people all over the place as well.

So you get some questions.

Need some help reach out to him at Phil's tax hacks.com.

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And we'll see you next time here on the podcast.

Thanks for hanging out.

Phil is always appreciate your time.

Thanks.

And we'll catch you later on Phil's tax hacks and other retirement facts.

Phil!

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