Most of the people we see who have life insurance are wasting money. Either they have the wrong amount or they pay too much for it. Here’s how to know if your insurance plan is efficient.
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Speaker 1 (00:07):
Welcome back to 30 Minute Money. It's the podcast that delivers action-oriented smart money ideas and bite-sized pieces. I'm Scott Fitzgerald at Roc Vox Recording and production, and joining me in studio is Steve Wershing of Focused Wealth Advisors, the man with the plan, the financial plan.
Speaker 2 (00:24):
The financial plan. Many financial plans.
Speaker 1 (00:25):
Many financial plans. Nice to see you,
Speaker 2 (00:26):
Speaker 1 (00:27):
Nice to see you as well, sir. And this is a great episode that we're going to cover today. Stop wasting money.
Speaker 2 (00:36):
Stop wasting money on
Speaker 1 (00:38):
Life insurance. Life insurance. Exactly.
Speaker 2 (00:40):
Yes. Specifically about life insurance. And I should start by saying life insurance is a very important tool in a financial plan. It serves some vital purposes, and I also see a lot of people wasting a lot of money on life insurance. And so I wanted to talk about what kinds of things waste money and how you can protect yourself against it.
Speaker 1 (01:01):
And this is important because I'm very interested in life insurance now that I'm in my fifties and my wife has, I won't say a lot of health problems, but we're getting older, and so that's on our minds. So I'm interested to see what you have to say
Speaker 2 (01:19):
Today. Yeah. By the way, if you have health problems, it's probably too late to think about life insurance.
Speaker 1 (01:23):
Yes, yes, yes, that's true. That's true.
Speaker 2 (01:25):
I've had two clients this week that we applied for insurance and they came back as, oh, not at that price. We won't. If you want it, it's going to be twice as expensive, three times as expensive. That's another good lesson we were not going to talk about today, but think about it before you get sick. Once you get sick, it's a lot harder.
Speaker 1 (01:50):
If you could plan that, that'd be great.
Speaker 2 (01:51):
Exactly. Well, did you ever see those commercials? I forget what the product was, but Well, let's see. Tuesday, I've got a management meeting at 10, and then I'm going to see this person at 11 and then one o'clock I'm going to have a heart attack and I'm going to be out for two weeks
Speaker 1 (02:06):
Tomorrow at two, someone's going to back into my car.
Speaker 2 (02:08):
Yeah, exactly. Exactly. Yeah. Obviously you want to do planning before any of that happens, but I still see a lot of people coming in with insurance plans that are not well put together with, that don't fit into their plan very well, and they end up spending more money than they should on insurance. And so I want to help people avoid that. Insurance is very important and we want to make sure that we do it in a cost effective way.
Speaker 1 (02:39):
And it's interesting because I never, and we both know that I'm, I don't have a head for numbers, which is why I'm sitting here with you to learn, but I never thought of life insurance as something that is in one's portfolio as in your financial plan. And that's interesting to me.
Speaker 2 (03:03):
Yeah, it's not an investment per se, but it's definitely something in your portfolio of assets. Yeah, and it should be looked at the same way. It should be reviewed periodically. And that's a big part of what we're going to talk about today is just you got to keep up on it. You got to keep current with it. And so the first thing that we should ask, if you've had a policy for a long time, the first thing we should ask is, do you still need it? Right. So I joke with clients that we don't insure lives. We insure income streams. And so the most basic reason why you have insurance is because if you have other people who rely on your income, if they were denied your income, they would be in financial trouble. That's what we have insurance for is if you have a spouse and little kids and it takes both of your incomes to keep things going.
And if one of you were not there, then the others would really have a tough time. Well, we get an insurance company to come in and replace the present value of your stream of income so that they won't suffer. But insurance, permanent insurance especially is a long-term strategy. So the way to use it well is to hold it for a long time, but we still have to ask the question, 20 years down the road, 25 years down the road, do you still need this coverage? So that's something that we should run through those calculations once every few years and just say, if you were suddenly not here, what would your family need? And how much of that do you have available in things like retirement plans and that kind of stuff? And the difference is what you would need in insurance. Does it still match what you have?
Speaker 1 (04:49):
So when you say do you still need it, you're sort of talking about is that policy right for your situation now? That's
Speaker 2 (04:56):
Right. Yep. That policy and that amount, right. Is that still right for your situation? Now, as I said, permanent insurance especially, so if you're not using term and if you're setting stuff up for the long-term, it can make a lot of sense to get some permanent form of insurance that builds up a cash value. It is a long-term strategy. You should have one of those things in place for a long time, and we should look at it every once in a while because things change and sometimes it makes sense to question whether or not you should hold onto that one. So for example, the actual cost of the insurance, the internal cost of the insurance is based on mortality tables that are published by the government. And those change every 10 years when they take a census, they publish an updated set of life expectancies and that changes the costs of insurance. And so if you've got a policy that's 30 years old, well, that was probably three censuses ago and we're living longer now than we used to. So insurance is less expensive. So if you've got a 10-year-old policy, it's probably fine. If you've got a 30-year-old policy, well,
Speaker 1 (06:07):
And that typically will stay the same and you have to go back and reevaluate it and see if you're overpaying, like you could get a different policy that's more in line with the
Speaker 2 (06:21):
Stats. And if you got one really young, I mean this is an extreme example, but sometimes parents buy their children when they're still little kids life insurance. And when you're a little kid, the insurance company has no idea if you're going to grow up to be a smoker, if you're going to have a risky lifestyle. So they have to assume all the worst things. And so if you've got a policy from when you were a kid, well now they can look at you. You're grown up, you're a responsible adult, you don't smoke, you keep fit. Well, that's a whole different underwriting situation. So you could get a lot less expensive insurance now that they know. Now they have a good idea how you're going to turn out. That's something that should be taken a look at. And so that's something to take a look at.
Another thing is that there are some policies that underperform, right? There are some policies that they were built one certain way and they were projected one certain way. It just didn't really turn out that way. And so we should go in and take a look on the inside of that policy and make sure that it's still performing the way it should. Another possibility is that maybe you still need the insurance, but maybe it's got riders you don't need. So one of the favorite things I like to kick around a lot is accidental death and dismemberment. So accidental death and dismemberment is a rider. You can put on a policy so that let's say it's a hundred thousand dollars policy, if you pass away, your beneficiary gets a hundred thousand dollars. If you die in an accident, they get, for example, $200,000. I have real trouble with paying extra for that because if your family is denied your income and you need insurance, I don't care how you die. Right?
Speaker 1 (08:07):
Yeah, I guess that's true.
Speaker 2 (08:08):
True. Do you need it or you don't? It's like, well, if your family is going to need a hundred thousand dollars if you pass away, but if you pass away in a car accident, they're going to need two. No, that doesn't make sense. Yeah.
Speaker 1 (08:18):
Interesting. I never thought of it that
Speaker 2 (08:19):
Way. We should take a look at those riders because those riders, in some cases it's not. It's money that's not terribly well spent. So we should take a look at that. One of the biggest risks, however, is that the policy may not last as long as you originally anticipated. So if you have whole life, which is one kind of permanent policy, pretty much everything about the policy is guaranteed one way or the other. And if you pay your premiums on time, the policy is going to continue to accumulate cash value and it's going to be there for you when you need it. But the other big one that came out probably in the 1970s was something called universal life. And Universal life, basically just uncouples, all those things. If you get a whole life policy, if you tell me how much you need, I'll tell you how much it's going to cost you tell me how much you want to put into it, I'll tell you how much death benefit you can get.
It's all very directly related, universal. It kind of pulls those apart. So you can say, well, I need this much coverage, but I want to pay about that much. And it's all, when you pull those things apart, you get some flexibility, which can be nice because we can do some fancy planning things with it. It also creates some risk because if you don't put enough money into it, it can collapse. And so I've seen lots policies. That does not sound good at all. No, I've seen lots of policies where when they originally got it for the people, well, like when I first got into the business a long time ago, we were coming out of a period of very high inflation, very high interest rates, and agents figured that they could sell more insurance if they charged less for it. So they just illustrated policies where they said the cash value was going to earn 8% forever.
Well, and that didn't happen, and it didn't happen as early as the eighties, and it continued to not happen for the past 40 years. And so I used to look at a lot of those policies that were based on the assumption that the cash value would always earn 8% and it had been earning 4% for the last 20 years. Even continuing to pay the premiums that they were paying, it was going to fail it. They were going to get a really ugly notice in a few years saying, oh yeah, well, it's not going to be 500 a year anymore. Now it's going to be 6,000 a year just to keep it in force. So we want to take a look at the health of that policy and make sure that it's still on track for things. And the way that we do that is to get something called an enforce illustration.
So when you bought your policy initially, you probably got this little printed out spreadsheet with all these columns of numbers on it, with projections on how the policy was going to perform. Well, one thing I can promise you is that that's not how it's going to perform. I dunno, it's if it's going to perform better or worse, probably worse, but how much worse? I have no idea. But it's not going to turn out like that. So every three or four years, if you have a permanent policy, you should be getting what's called an in-force illustration where basically we send a request to the insurance company saying, assuming we continue to pay the premiums just like we have Ben, we'd like a reprojection of that illustration. And they'll update that illustration that you got initially based on what's going on today. And sometimes that will uncover a lot of really interesting things about a policy. And there are times when you might say, when I bought this, it was supposed to last until retirement. Now it looks like it's going to run out of money when I'm 47 years old. So that's one of the big secrets to making sure that you're not wasting money on insurance, is to get those in force illustrations every couple of years and make sure that the policy is still healthy and still operating the way it should.
Speaker 3 (12:00):
Your retirement is at risk, not from the stock market, not from inflation. Taxes are putting your retirement at risk. I'm certified financial planner, Steve Waring and I specialize in helping people create low tax retirements. Unmanaged taxes can take 30, 40, even 50% of your retirement income. Learn how to defend yourself against excess taxation. Our complimentary webinar will cover all the principles you need to know to protect your money for you and your family, and keep it away from the government. This free webinar will cover how taxes are different in retirement, the taxes you pay in retirement that you don't have to pay during your working life, how to move savings into a tax-free environment, the Widows Tax, the Secure Act, the Secure Act 2.0 and what they mean to you. The webinar is free, but you have to register to save your spot. So go to focused wealth advisors.com/webinars and find out more and sign up right there. Even if you're not planning to retire for the next five or 10 years, this information will be critical for you. The longer you have to put the strategies into effect, the more you can accomplish. That's focused wealth advisors.com/webinars to find out more and to sign up today.
Speaker 1 (13:26):
All right, stop wasting money. Review that life insurance policy. 30 minute action item.
Speaker 2 (13:31):
Yeah, so besides just evaluating whether or not you still need insurance, which is where it all starts, the 30 minute action item is get an in force illustration. If you have a permanent life insurance policy, get an in force illustration check on its health.
Speaker 1 (13:44):
Thanks again for listening and watching the 30 Minute Money, three zero minute dot Money. You can find us on all the podcast platforms. Make sure you like, subscribe, share, tell your friends if you want to get in touch with Steve Wershing at Focused Wealth Advisors. There's a link to his calendar in the show notes. I am at Roc Vox recording in production here in Bushnell's Basin and just outside of Rochester, New York. Thanks for joining us on 30 Minute Money. We'll catch you next time.