Infinite Banking – How to Get Started with Life Insurance
Insurance is a tool that transfers your risk due to an unforeseen event to an insurance company.
For example, if you had a high cost regarding your auto, home, etc., the insurance company takes the burden of financial responsibility, instead of you.
In most cases, the coverage is for something an accident, illness, fire, or flood that you hope never happens. You insure against having to pay for the loss yourself if it occurs.
Human Life Value
Life insurance is unique in that it covers a guaranteed life event. While it may seem morbid to talk about death, it’s a guaranteed event that will happen to all of us at some point, it’s just a matter of when. In planning for anything unknown, we want to make sure that our plan works out in the widest range of possible outcomes. No matter what happens, we want to be set up for the best case. Or in mama’s words, “plan for the worst and hope for the best.”
I want to dive into your questions as you initiate or expand the dialogue in your own life about your life insurance to give you a frame of reference to have clarity in these important decisions: How do you think about it? How much do you need? What type do you want? What will the coverage do for my family?
To begin, let’s talk about the economic value of your life. It’s a calculation involving your current income and your number of remaining working years. This number is used by the life insurance company to determine how much insurance they will give you in terms of the amount of coverage (death benefit).
For most people, their human life economic value is usually tremendously higher than they would have anticipated.
Using the calculator at LifeHappens, you can calculate your own human life value.
For example, someone age 35, earning $100,000/year in a 28% tax bracket, and planning to continue working through age 65, has a human life value of about $3.8 Million. What does that mean? If they today were no longer able to continue working, $3.8 Million is the amount of lost income their family would experience, based on their income and working years left. This is the amount of money that would be required today to continue providing their family their current standard of living if all income stopped today.
Life insurance allows your family to continue the same standard of living they experience today, whether or not you are here to provide it for them.
What type of insurance will give the most benefits, whenever you pass on, regardless of the timing?
There are two types of life insurance that we recommend, at opposite ends of the spectrum. While there are many other products in between (you may have heard of variable, universal, equity-indexed products, etc.), we’ll leave them off the table in this discussion, because they are not pure forms of insurance that give clear-cut guarantees.
At one end of the spectrum, you have term life insurance. Term insurance is, simply, a premium paid to the insurance company for insurance over a span of time, a set timeframe, usually 10 – 20 years. It’s insurance that you purchase today so that if you pass away during that period, the death benefit is paid to your family. The problem is that if you continue living past the term, your family gets nothing. It was purely an expense.
You want to live a long life, but you also don’t want an unnecessary cost that you get no benefit or advantage from.
At the other end of the spectrum, you have whole life insurance. The reason it’s different is that it gives you a guaranteed premium, guaranteed death benefit, and guaranteed cash value that’s a portion of your death benefit inside the policy that you can access and use today. This type of insurance will continue for your whole life, which, as determined by the current Commissioners’ Standard Ordinary [CSO] mortality tables to be age 121. If you live that long, the policy will mature, meaning the cash value in the policy will equal the death benefit, and if you are still living, the insurance company will pay out the full policy value to you at that point.
Now, we’re not likely to live to 121, but life expectancy is increasing, and people are living well into their 100s. You want a plan for having a death benefit that transfers to your heirs whenever that occurs, even if you are well past age 65 or 70 when you’ve stopped working.
Why have a death benefit after age 65?
Whole life insurance is just that, for your whole life. Your cash value can become your “permission to spend” down the principle of your other assets in your later years, act as a buffer for unexpected expenses, and maintain your net worth. In legacy planning, whole life insurance is one of the best tools to pass on wealth to the next generation as it allows you to transfer an inheritance tax-free to your heirs. The death benefit will always be more than you pay in premiums, multiplying the gift you give to the next generation.
Where does whole life insurance fit in your personal economy?
Whole life insurance is a place to store and have safe, liquid, growing dollars that you can use. This is the foundation and substance of a healthy financial life. We believe that whole life insurance is the most effective and efficient tool to serve this purpose in your personal economy.
The reason is that the cash value is not subject to market risk and fluctuations – never goes down in value, growing at a rate of 3 – 5% (in today’s low dividend environment) tax-free net return, and is a liquid asset that you can use or loan against. For instance, you could use it for an expense like purchasing a car or going on vacation. An even more valuable use of your liquid cash value is to utilize it in assets that produce growth or cash flow for you, meaning that you can get your money working in multiple places for you at the same time.
Why have both?
The reason that I share this divergence of the two types of term and whole is the need for both. Not just one, and not just the other. Many people pit one type against another in a heated term vs. whole life debate, but it’s unnecessary and ends up missing the whole picture.
For whole life insurance per the amount of death benefit, you will pay more in premium. Premium is the dollars you pay into the policy to keep the policy in force. For instance, for the same initial death benefit amount, you may put $2000 into a whole life policy or $100 into a term policy.
While term premiums are lower, they are an expense. Whole life premiums, while higher, can be thought of as savings. Most people cannot afford to buy their entire human life value in whole life insurance. Term insurance allows you to fill the gap between your whole life insurance death benefit and your human life value.
Term life has no living benefits at all. You cannot use the policy at all while you are living. The only benefit is the death benefit paid out to your heirs when you die if you die during the term of the policy.
However, if we only look at life insurance as a place to store cash, and we forget about insuring you for your full human life value, we’ll lose the opportunity to ensure that your family is taken care of in the event of a personal tragedy.
The goal is to have a hybrid plan where we use whole life insurance as your place to store cash, where your primary dollars are going into your account of safe, liquid, growing, guaranteed money. And we want to use term life insurance to get you up to your total human life value.
For example, this may look like having a $300,000 policy of whole life insurance and another $1.7 million term life policy.
Ideally, your term policy is convertible, meaning that at some point in your life, whether you receive an inheritance, lump sum of money, or an increase in income, you want the ability to convert portions or all of the term life policy into another whole life policy.
Ideally, you want to make sure your family is covered for your full human life value, and also ensure you have the greatest asset to store cash.
One last thing to note, many people believe that you have to be the working spouse that provides the family’s primary income in order to need or qualify for life insurance or have a human life economic value. This is not the case. Even if you are the spouse who stays home with the children, it’s important for you to have life insurance. The reason is that if you were no longer living, there would be a tremendous additional expense to your family for childcare, cleaning, etc., for all the responsibilities that you handle on a daily basis, which may not bring a dollar amount into your household, but which are truly an economic value.
I hope this sheds some light and brings some clarity into the world of life insurance, and how to start thinking through this in your personal life and your family.
I’d love to have a conversation with you if you want to talk through these ideas or figure out how it might work for you.
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