Is Life Insurance a good idea?

Question

I know this is like asking "are peas good" and will get a lot of "it depends" answers, but here's the basic question:

If your death (and subsequent lack of cash flow) will significantly affect your family and loved ones, you should have life insurance.  Kids can't go to college, house has to be sold, not sure if we can afford the services, etc.  Great, get life insurance.

But if you have a good rainy day savings, wife has her own job, we live in a modest house, have investments that will provide some continued cash flow... is the cost worth it?  I've always looked at life insurance like a refrigerator extended warranty.  If you can't afford to replace the fridge when it dies, maybe the warranty is worth it.  But if you have enough money in your account to repair/replace it when needed, it's a waste of money.  Is life insurance the same 'scam'? Or have I just had a skewed vision of life after death?

Thomas Rutkowski · Answer

Life insurance is more than just a death benefit.

1. The cash value of an over-funded policy can be used to generate tax-free retirement income. Contrary to what you'll here from the haters, that I'm sure will be coming out of the woodwork, it is a very efficient savings vehicle in its own right. Cash value can generate 2-3 times the income of the same amount of money in an IRA/401(k) or brokerage account. As a result, the lower potential earnings power doesn't have the effect you think it does. $1 Million of cash value can generate as much after tax income as $3 Million in traditional retirement assets in an IRA. And even if it doesn't earn a better rate of return, its still the safe money of your retirement portfolio.

2. The cash value of an over-funded policy can be leveraged. This is a powerful source of funds for deals. It allows you to put your money to work in two places at one time. No different from leveraging one of your properties to invest in another. Listen to my interview on @Seth Ferguson 's podcast for an explanation of the numbers. You can make more money by putting your money into cash value and then leveraging it to invest in "A" than you would by simply investing directly in "A".

3. Estate taxes are high! Life insurance in an irrovocable life insurance trust (ILIT) can make sure that all of your assets pass to your heirs.

Its hard to go wrong with a properly designed, over-funded policy. The death benefit protection is there in the years it is needed. The policy's cash values will quickly reach parity with the premiums meaning you can get back the money you put into it. If you need the money for retirement income, it is there. If you don't, it simply passes to your heirs.

Most of what you think of as the high cost in a permanent policy is the cash value. The cash value is quite literally you saving up your own death benefit over your expected lifetime. If you surrender the policy, you get that back.

Seth Ferguson · Answer

Besides the death benefit stuff, there are some neat things you can do with over funded life insurance policies and leveraging the policy to invest in real estate. Have had a few guests talk about it.

James Wong · Answer

@Mike McCarthy

I’m a huge advocate of life insurance. My father recently passed unexpectedly and the amount of estate issues is tremendous. Lots of creditors and it’s a nightmare to deal with. What if you are hospitalized, need long term care services, need to burn through your emergency funds, etc. I give an extreme case but this is what happened to me. The point is, your family members might not know what’s out there and they may get stressed out dealing with a passing and all the financial issues left behind. I think it’s selfish to not have it. I would not want my family members to stress out financially over my business ventures. Yes they can liquidate your assets but that will take time. I respect all perspectives on this forum but just consider how your family will be if they had to deal with everything you’re dealing with. Right now, I have a high policy term insurance for dirt cheap.

Todd Blyton · Answer

@Mike McCarthy

You might want to research what is call IBC, infinite banking concept, family bank.  Nelson Nash should be a name to look up.

If you set up a whole life policy with a large cash value and a good paid up additions rider it can act as a cash reserve account with a tax beneficial death benefit.

Do some research not all agents are going to know how to effectively  set up a policy, and the policy should be set up with a mutual insurance company.  When the policy is with a mutual company your whole life policy makes you an equity holder of the mutual company and therefore entitled to dividends if any.

It took me almost a year to fully understand and set up a system using this policy structure.

Another book of interest along this thinking is “what would the Rockefellers do.”

As Kim Butler says.  You can rent your insurance with term, or you can own your insurance with whole life.

There are many other types of whole life but the safest one is the simple Whole life policy.

Michael Ealy · Answer

Agree with Thomas.

Sophisticated investors have life insurance (term and cash value) as part of their overall financial plan. 6 months of savings will easily be wiped out with the death of the bread winner. Also, rental properties take time to sell. If they sell your rental properties, they also pay taxes. Life insurance proceeds are tax free.

There are term-life insurance now that you can get cash from if you become terminally, chronically or critically ill (like cancer, heart attack or stroke). Based on the research done by one of my staff members, 48% of foreclosures happen when the breadwinner stops working because of a critical illness.

Some of the properties I bought in the past are from motivated sellers who became critically ill or had a death in the family. So having real estate investments do not reduce your need for life insurance. Having life insurance prevents you or your heir in becoming motivated sellers.

You can use life insurance to offset estate taxes as well since your heirs get life insurance payouts tax free.

And lastly, there are life insurance that can be structured so that if you don't become sick or you don't die in 30 years, you get all of your premiums back.

So, YES, life insurance STRUCTURED PROPERLY is a VERY good idea.

Seth Ferguson · Answer

@Thomas Rutkowski was a great guest and had a lot of really good information and tips. I'm not allowed to post a direct link, but a Google search of both of our names will find you the interview.

Colt Savage · Answer

Would you be able to elaborate more on this, please? I'm trying to find out how I can utilize life insurance for the tax free income down the road, but also would like to leverage the policy to create additional wealth through real estate. Thanks in advance!

Thomas Rutkowski · Answer

@Mike McCarthy

"Most" insurance policies are minimally-funded. When you call up an agent and ask for a quote on a $1M Whole Life, for example, the agent is going to give you the lowest price possible to be competitive with all the other carriers offering quotes. Under the hood of the policy, the insurance company is doing two things with the premium: First, they're setting some of it aside into a reserve fund of sorts so that if you live to your normal life expectancy, you'll save up your own death benefit. Second, they have the risk of you dying prematurely so they have to put enough money into a pool to make sure they can pay claims. This is the "mortality cost" that agents refer to. It is essentially a 1-year term policy that is renewed every year. This covers the delta between the savings (cash value) and the death benefit.

That is an example of a minimally-funded policy. The insurance company is collecting the bare minimum amount of money that is necessary to fund this policy for the life of the insured. Least amount of Premium/Most death benefit per dollar. This is also the policy design with the highest fees and commissions.

An overfunded policy is the polar opposite. It is a policy designed for the lowest possible death benefit consistent with the regulatory definition of insurance. This design maximizes the cash value while minimizing the death benefit. It is not without fees, but it is a much more efficient vehicle for creating a private bank or retirement savings. The haters do not distinguish between the two policy designs and lump them all together as "Life Insurance Bad".

A properly designed policy should have about 85% cash value to premium. If you understand that this remaining 85% cash value can generate income 2-3X that of traditional savings, you'll see that even after paying the "high" fees, you'll still get more income even from those first few dollars in the policy.

This is a link to a blog post with a more detailed explanation...

https://www.biggerpockets.com/member-blogs/7595/77981-whole-life-vs-indexed-universal-life-life-insurance-101

Mike McCarthy · Answer

@Thomas Rutkowski, that's exactly the information I was looking for.  I've never heard of an over-funded policy, so it gives me enough to start researching.  I've never liked the idea of spending money on something I might or might not get back.  I will definitely take a look at your interview and see what it has to say.  @Seth Ferguson, thanks for steering the conversation that direction.

@Anthony Wick, @John Teachout, your comments concur with my basic thinking about term policies and more 'standard' insurance policies.  Thanks!

John Teachout · Answer

If there are financial means to take care of family that needs financial help if you die, then I think life insurance is not necessary. Keep in mind that estates sometimes have taxes which life insurance does not.

I currently don't have any life insurance but no longer have kids that are depending on me financially. We have enough assets that my wife would be financially ok.

I did have term life insurance when it would have been a financial struggle with dependent children.

Is Life Insurance a good idea?

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