In a prior post, I shared how being “radically open-minded” in order to see things from a different perspective can help you make the best decisions for you and your families. This is one of the key success principles from Ray Dalio, Bridgewater founder, and it can help you see possibilities and opportunities that many will not.
In Part 1 (click here) of this post we discussed differences between term life and permanent insurance. Here we will look at ways in which insurance can (and should) be tailored to different stages of your life.
Key Takeaways
- Insurance should evolve with you over time. Don’t treat it as a “set it and forget it” decision.
- In your 40s and early 50s, start looking at insurance from a retirement planning perspective.
- Term and whole life work in opposite directions. It’s important to understand the difference.
- Life insurance is not simple. Here are four common mistakes to avoid.
Insurance adjusts to your life stages
When it comes to insurance, I like to remind clients that it’s not a set-it-and-forget-it decision. Your needs will change over time and so does your insurance.
When you’re young, healthy and fresh out of school, you can start with a term life policy to cover your “human life value.” Your term life policy can be easily converted into a permanent policy when your cash flow permits. This is the time of your life to get life insurance–when you’re in good health and thus, policies are cheap to protect your number one asset…you!
As you get further along in life and you’re able to save more. A permanent policy is the best place to store “safe” money long-term so it will not depreciate when the markets are volatile as they are today. With permanent life, you’ll always have ready cash whenever you need it. As Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family is credited with saying is that “the time to buy is when there’s blood in the streets.”
When you get into your 40s and early 50s, it’s a good time to start looking at insurance from a retirement planning perspective. The right kind of policy can help reposition your assets so they’re available tax-free for life. The right policy can also increase your investable dollars and then enable you to transfer those assets to your heirs when you die–with minimal expense and hassle.
As you get into your 60s and 70s, insurance can become an integral part of your legacy planning and charitable giving. Structured correctly, the right policy can give you peace of mind while allowing you to receive more income from your other assets. Integrating your insurance with your investments will help both vehicles perform significantly better long-term than they would if used independently. Long-term care insurance comes into the discussion as both a form of healthcare insurance and as a legacy planning tool.
Term and whole life work in opposite directions
Term life is most valuable on the day you purchase it. Every day thereafter term life loses value as your death benefit stays the same while you continue to pay a premium. Whole life is the opposite. It starts off slower than term at the outset, but it becomes more valuable and efficient over time as all the cash value guarantees continues to rise each year.
When you think about it, whole life is a lot like your mortgage—each month, more and more of your monthly payment goes toward principal (cash value) as time goes by. For universal life policies, there are no guaranteed cash values, but there is a guaranteed interest rate. For policies that are tied to the stock market or a stock index, there are no guarantees of the cash build up and are subject to increased risk.
Common mistakes
Life insurance is not simple. It can cause a lot of confusion. Here are four common mistakes to avoid.
- Trying to take the cheapest route possible based on the cost of a premium only.
- Not obtaining enough death benefit to secure your human life value.
- Thinking short-term and not taking into account the full costs of a policy over your lifetime and future generations.
- Not utilizing a mutual insurance company. Using a mutual insurance company makes you as a policy owner a part owner in the company. This makes you eligible for profits of the company through annual dividends if using a whole life policy.
Conclusion
Sure, insurance has a lot of acronyms and advance math associated with it, but the underlying principles are simple. You want to contribute an optimal amount of money on a regular basis for a massive amount of peace of mind. When structured correctly, you’ll have safe and consistent tax-advantaged growth, liquid cash, and the ability pass on wealth very efficiently to the next generation.
