Life Insurance in 800 Words

by JT McGee

Life insurance has to be one of the most heated topics out there.

I’ve always thought it’s a little too sensationalized. On one end, life insurance is a very valuable product that does serve a very good purpose. On another, it’s a product which is so deeply rooted in tax and bankruptcy law that it has been used for almost anything.

Life Insurance Benefits

So life insurance is obviously great for end of life planning. No one wants to talk about it, but we’re all mortal beings. We won’t last forever.

Part of me thinks that life insurance is only necessary for couples – especially those with dependents. If I pass tomorrow, I leave no one behind. So my Gerber policy from years ago that my parents maintain is good enough to put me in the ground and call it a day. That’s good enough for me.

But if I were in a situation where income replacement were also important, I’d probably have loaded up on life insurance. I mean, so long as the person you marry isn’t crazy – too many people have been killed over life insurance – having a million-dollar (or more) policy really isn’t all that expensive. Figuring it out on a 4% withdrawal rate, you’re looking at a million bucks just to replace $40,000 in income. If you have a family with one stay at home parent, life insurance is ten times more important.

A million dollars in term life insurance really isn’t all that expensive. So, rule of thumb: take your income, divide by .04, then buy that amount of term life insurance for the period in which you need it. This really isn’t all that difficult, and frankly, life insurance is so inexpensive for relatively younger/healthier people that we’re talking about fractional pennies on the dollar for insurance each year. Genworth Financial has great information on the topic of how much you need, and is more exact than my own numbers. But seriously – more is probably better than having too little when it comes to income replacement.

Life Insurance’s Hidden Gems

And there are also very important tax and legal concerns that come with life insurance. Most people forget that whole life insurance is much like a retirement plan in that it is very, very insulated from bankruptcy and litigation concerns.

For example: my state has virtually unlimited protection for a 401k and whole life insurance policy. In most places, whole life insurance is even protected from malpractice lawsuits. I’m not a doctor, nor do I plan to be, but it’s a key piece of information for wealth planning.

Now, does that make whole life insurance worth it? I don’t know. See, whole life insurance is still fairly expensive – it’s really just a retirement account disguised as insurance for the purposes of evading taxes, bankruptcy courts, and litigation concerns. Whole life insurance is a super-rich people’s financial product, one which is intended to PROTECT wealth more so than it is to grow it.

Most people don’t get that. It’s a problem of the sales process: free advice is tailored to people who cannot afford to pay for financial advice. So whole life insurance isn’t a popular topic.

But ask any real wealth management person about the power of whole life insurance and they’ll probably give you a completely different answer than you’ve ever heard before. Every super wealthy person out there has millions of dollars in whole life insurance. It isn’t a boondoggle of a money pit, it’s a vehicle for protecting a substantial part of their wealth from relatively unpredictable events. You never know if that guy or gal you marry is a gold digger – oh, did I mention whole life insurance is decidedly owned by the person who is named on the policy in the case of divorce?

See, that’s where whole life insurance has value.

Rounding it out

Bottom line is this: term life insurance is not expensive. Take your income, divide by .04, and purchase that much of it. Boom! A template for getting income replacement based on a very, very conservative model for people who need the income protection.

Here’s a more complicated life insurance calculator, for those who are interested:

For those who are wealthy, on their way to incredible wealth, and who already max out their retirement accounts, whole life insurance makes for another great funnel for cash because it’s safe. Yes, it is higher cost, and yes it is restricted by withdrawal criteria, but the fact is that it is exceptionally safe in the event your wealth ever finds a natural predator lying in wait – massive lawsuits, bankruptcy, or crazy deranged significant others chasing after every penny of your net worth.

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