Is someone trying to sell you a life insurance policy because it’s a good investment? Listen to this episode before you do anything...
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Speaker 1 (00:07):
Welcome back to 30 Minute Money. I'm Scott Fitzgerald at Roc Vox Recording and Production Studios in Rochester, New York. Joining me is Steve Wershing from Focus Wealth Advisors.
Speaker 2 (00:17):
Hey Scott, how you doing? Nice to see you.
Speaker 1 (00:20):
A nice to see you too. Today we're gonna talk about life insurance. Is it a good investment?
Speaker 2 (00:25):
No, it's not. Thanks for joining me, . Have a good afternoon. I'll get you next time. Well, and, and this, this topic came from an article that I read this week and you know, one of the things that was in it was this sentence that said, nevertheless, even with higher premiums, life insurance is still a good investment. No, no, it's not actually. And now I wanna be clear. I use, you know, that there are a lot of strategies, especially tax strategies that leverage insurance and insurance can be a great tool. It can, it's a great thing to use as part of an overall financial plan, as part of an overall tax strategy. But I really need to dispel this whole thing that, just that simple statement of fact that, oh, insurance is a good investment. Not, not if you just take that as if that's all there is.
No, no, no, it's not because you're paying for something when you put money into an insurance contract that you're not paying for in most other kinds of investments. And that needs to be considered. And so I just really wanted to address that head on. Like I said, I, I utilize insurance in a number of different strategies and in the context of taxes and those kinds of things, it can be a very effective instrument. But I don't think that we should be oversimplifying it to the point of just saying, you should get insurance cuz it's a good investment. It needs to be taken in a broader context than that. Yeah.
Speaker 1 (01:49):
So then how do we figure out if it's something that we should use as part of an accumulation strategy?
Speaker 2 (01:53):
Yeah, so, uh, it's good to look at it in the context of things and, um, and, and do more of an analysis, um, to figure out whether or not it works in the context of a bigger, of, of a bigger strategy. So, um, you know, you want to take a look at how much you can accumulate in there. You need to take advantage. You need to take into account the tax benefits of it. And importantly, I mean, the whole reason for insurance fundamentally is to provide protection. And so if you need protection, well then yes, the insurance is a, is an indispensable tool, but the, um, but you know, it gets, it gets really tricky because it's because of those internal expenses to pay for that protection. You can't just directly compare it to investing in a stock or investing in a mutual fund or something like that.
And one of the things that, that makes me a little crazy. I, you know, I talk to a lot of insurance experts as I work on developing strategies for clients, I'll routinely call experts to get some of the finer points to make sure that I'm doing the right thing for folks. And I was doing that this week actually, and was talking to somebody and he was talking about the, the, the, um, the rate of return that you would get on this policy. And he continually, he continually referred to, well it has this cash value buildup and then, you know, you, and then you get, you get the death benefit at the end. And I'm like, no, you don't. Right. You only get a death
Speaker 1 (03:19):
Benefit. Somebody else gets the death benefit,
Speaker 2 (03:20):
Somebody else gets the death benefit. Right. You don't get, so, you know, when you talk to insurance experts, a lot of times they'll say, well, you know, you have this cash failure you build up and then you get the death benefit. No, you don't. You're dead , you don't get a death benefit until you're not here anymore. Dead
Speaker 1 (03:34):
Men can't buy, somebody
Speaker 2 (03:35):
Gets it. Now if you're, if you're thi and this, and this is one, one area where insurance can work, right? So if you're not just concerned about saving for your own retirement or your own wealth, but you wanna worry about your legacy or you wanna, you know, if you wanna specifically leave a certain amount to your family or those kinds of things, or if you wanna leave some to an organization, yes, the death benefit into it, but it's not as easy as just saying, well, we take the premiums and then we figure the cash value and then you get the death benefit. It's gotta be a little deeper than that because Yeah, you don't do that. So, you know, you'll get, whenever, whenever you get a proposal from an insurance company, you get what's called an illustration, which is like a big spreadsheet that shows you the death benefit and shows you the premiums and shows you the cash value build up.
And at the end of one of those things, invariably it has a calculation of internal rate of return. Well, internal rate of return is a statistic that investment analysts use to figure out how much you're making on an annual basis in some specific kind of investment. But when you look at internal rate of return with an insurance contract, invariably they include the death benefit. And we really have to question whether or not that's legit. You know, because now if you're, if, if the plan is for the heirs, if the plan is for an outside organization, okay, cool, I'm totally down with that. But if you're thinking about an investment for your own future, no, that's not part of the internal rate of return because you never get to use it. It's the people you leave behind.
Speaker 1 (05:00):
So that's kind of your point here is that people are going out saying, Hey, you know, life insurance is a great investment. Exactly. And you're like, well, for who?
Speaker 2 (05:08):
Well, right, exactly. And, and it was in the context of, you know, planning for people who were approaching retirement. And one of the, you know, the point that led up to that sentence that I, that I quoted before is that well yes, if you don't do it right now, if you wait a few years and you're a little bit older, yes the premiums will be higher. That's when you get the sentence, nevertheless, it's a good investment. Well, hang on a second. Yeah. There comes a point at which it's not that good an investment anymore. If you get, if you get, if your age gets high enough, then the intern, the costs of that policy get to a point where maybe it's not such a great investment anymore. Um, because we have to worry about how much they're gonna be charging you for that, for that internal, uh, that internal expense to provide the death benefit. Ultimately. Would you,
Speaker 1 (05:54):
Would you say that there's a certain age that's for people to look into life insurance
Speaker 2 (06:00):
Or it real Well, it, it really, it, I mean, it, it depends. It depends on a lot of things. So, you know, again, the first most important use of insurance is for protection. So if you're a young family and you have kids, if you have a lot to provide for and you've, you're too young in your career to have accumulated a lot, that's where insurance really comes in. That's where you really, really need it. Later on in life, as you get closer and closer to retirement, the different aspects of insurance can servee different purposes. And it really comes down to the policies design. So, for example, one of the things that I do for some clients, if, if the scenario is right, is a life insurance retirement plan, it can be very, if you've maxed out your, your retirement plans at work and your IRAs, it can be a very powerful tool to put more money away on a tax advantage basis.
But it's designed very specifically. So if you just went down to the coroner insurance store and said, Hey, I want to put $10,000 into an insurance policy, it's probably not gonna be a great investment. It has to be designed very specifically for that. And there are certain kinds of insurance policies that can be designed that way where you have some flexibility between, you know, how much do I put in and how much insurance do I buy? And in, in that kind of a strategy, the name of the game is how much insurance am I forced to buy if I want to cram this much money into the contract? And there are, you know, there are regulations around that and calculations. So it's, it's not as simple as saying at a specific age. Uh, it it depends on, it depends on a lot of things. It's gotta be, it's gotta be designed.
Well now, you know, saying that it brings up, you know, there are some significant advantages to using an insurance policy, um, in an accumulation strategy or especially in a tax strategy. So for example, when you put money into an insurance contract, and if you get the kind of insurance where you get to choose your investments, those investments grow tax deferred, that's good. Unlike an ira, there's no limit to how much money you can put in an insurance contract. And you put as much as you want to. The insurance company may tell you, okay, well if you wanna put in this much, you have to buy this much insurance, but there's no regulatory constraint on how much you put into an insurance contract. So that's good. So you can put a lot of money in that can grow on a tax deferred basis. When you pull money out, everything that comes out up to the total amount that you've paid into the contract comes out tax free because it's a return of capital.
So that's not taxed. And when you get to that point, this is how some of these strategies work. You put money into an insurance policy for a certain number of years, and when you start pulling money out, you start pulling out withdrawals. And then when you're close to the amount that you've put in total, you stop withdrawing. You start borrowing from the policy because policy loans are not taxable either. And as long as the insurance contract doesn't collapse, as long as you don't pull so much money out of it that it implodes on itself, then you know that that will remain tax free. And when you pass away, the loan is forgiven and what's at whatever's left goes to your beneficiary. So it can be a really powerful tax tool if it's designed well. But it needs to be designed specifically and it needs to be designed carefully. It's not, it's not like, well, I've put everything into my 401k and I've put money into my IRAs. I've got another 10, 20, $30,000 I wanna put away. How about insurance? And go and buy an insurance policy. It, it's, you need to, you need to find somebody who knows how to put those strategies together and design it well to serve that purpose so that it can give you a rate of return that you know d does not get depleted unnecessarily by the cost of the insurance.
Speaker 3 (09:43):
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Speaker 1 (11:09):
And as a general statement, no, it is not a good investment. What's your 30 minute action item?
Speaker 2 (11:14):
30 minute action item is how much insurance do you have and how much do you need? Compare those two and that's a basis for trying to figure out whether you have the right amount of insurance.
Speaker 1 (11:24):
I'd say that's a very sensible approach.
Speaker 2 (11:26):
There it is.
Speaker 1 (11:27):
30-minute dot money is, uh, where you can find the podcast, of course. And uh, Steve is at focusedwealthadvisors.com. You can find me at firstname.lastname@example.org. This is 30 minute Money. We'll catch you next time. Thank you.