 Personal Finance Powerpoint Presentation. Decision to Purchase Life Insurance. Prepare to get financially fit by practicing personal finance. Insurance is part of our long-term risk mitigation strategy where we follow the adage of major twice cut once, putting a formal process in place, looking something like set the goals, develop a plan to reach them, put the plan in action, review the results, repeat the process periodically. Most of this information can be found at Investopedia is Life Insurance Worth It, which you can find online. Take a look at the references, resources, continue your research from there. This by Amy Fontenille updated March 3rd, 2022. In prior presentations, we've been taking a look at insurance in general. Now we're focusing in on life insurance in conjunction with that overall discussion, noting that life insurance can kind of fall into that more standard kind of insurance similar to say property insurance in some ways and to liability insurance in some ways where we are insuring against something that we're hoping doesn't happen in the future, may not happen in the future, possibly statistically unlikely to happen in the future, but if did, would be financially devastating and therefore we insure against it such as the home burning down or someone suing us for thousands of dollars or us dying prematurely. We're going to insure in order to have people that still need money that might have been dependent on the money we were earning to have some insurance and safeguard against it, for example. So is life insurance worth it? That's the question then. So life insurance is something you may consider adding to your financial plan if you're interested in providing a measure of security for your loved ones. That's the general idea. The classical life insurance would be something like I have an income stream. I'm not the only one dependent on the income stream. Other people are dependent on my income stream. If I die, I'd like them to still have some support in some way. So proceeds from life insurance policy can be used to pay financial expenses, eliminate outstanding debt or cover day-to-day expenses. Whether life insurance is a smart investment, they depend on what you need and want a policy to do for you. I want it to fly me to the moon. Well, it's not going to do that, I don't think. But it might help you in the case that you die prematurely to help the people that are dependent upon you. So types of life insurance. When deciding whether life insurance is a good investment, it's important to understand the types of policies you can purchase. There are several variations of life insurance plans, but they generally fall into two categories. We got the permanent, we got the term. The term insurance is designed to cover you for a set term, hence its name. For example, you may purchase a 20-year or 30-year term life policy. So the term life insurance, as we've discussed a bit in prior presentations, will probably continue to discuss in the future, is kind of the more straightforward life insurance, where you're buying just straight life insurance. What are you buying? Life insurance. Why? Because I want to cover my premature death or something like that. How long is it going to be? Well, it's going to be according to the term. Pretty straightforward stuff on the term life insurance. As straightforward as this life insurance stuff can kind of get, in other words. These policies function similarly to other types of insurance policies you may carry, like car insurance. You pay a premium each month, and if something bad happens, in this case, your early death, there's a benefit paid out. So death is like good then, because there's a benefit when you die. Permanent life insurance, on the other hand, covers you for life as long as your premiums are paid. Certain types of permanent life insurance can also have an investment component that allows policyholders to accumulate a cash value. So the permanent life insurance has this cash kind of component to it, which makes it kind of like somewhat similar to investment stuff sometimes, and possibly having a tax advantage strategy to it. But obviously, as you add these other factors, it can also get quite a bit more confusing. So you want to think about why you're purchasing the insurance when you're purchasing the insurance. What's the goal? What's the objective? How do I achieve that? So when you hear financial advisors and more often life insurance agents advocating for life insurance as an investment, they are referring to cash value component of permanent life insurance and the ways you can invest and borrow this money. So when you're talking about life insurance as a kind of investment, then you're using the life insurance tool and some type of investment strategy possibly in order to get some kind of tax advantage on it. When you're thinking about, I want to just buy life insurance for the function of life insurance alone. What it does, you're probably then talking about the term life insurance, and there's a lot of arguments and debates in terms of what are the benefits of tax strategies with regards to life insurance and what would be the benefits if you were trying to separate these two things, having simply life insurance to be life insurance and then doing your own investments elsewhere and things like stocks and bonds and so on, which we might dive into a bit more in future presentation. Pros and cons of permanent life insurance, there are many arguments in favor of using permanent life insurance as an investment, however, many of these benefits aren't unique to permanent life insurance. You can often get them in other ways without paying the high management expenses and aging commissions that come with permanent life insurance. So the permanent life insurance, if you're looking at it as like an investment tool and strategy, then sometimes you might have higher costs to kind of manage that tool than you might have with other kind of investment strategies. Here are a few of the most widely advocated benefits of permanent life insurance. This being the more complicated life insurance kind of set up than the term life insurance. Tax deferred growth, so this is the permanent life insurance. Permanent life insurance policies that have an investment component allow you to grow wealth on a tax deferred basis. This means you don't pay taxes on any interest, dividends or capital gains on the cash value component of your life insurance policy until you withdraw the proceeds. So that deferral kind of component, you could think of that kind of similar to when you put money into like a retirement kind of account, the tax kind of benefits you're getting as you get the non-including of income possibly at the point in time when you earn the money and then when you pull the money out, that's when you possibly have to pay the taxes on it, but you're going to pull the money out at some point in the future and therefore you got this big deferral and that's usually a good thing. So this is similar to the tax benefits you get with certain retirement accounts including your IRS, your 401Ks and your 403Bs, meaning and most people are pretty familiar or more familiar with those, you get the tax benefit upfront and then they hit you with the tax and you get the money out which you have to remember because you're going to pay the taxes which means you deferred it. So if you're maxing out your contribution to these accounts year after year investing in permanent life insurance for tax reasons may make sense. So in other words the argument here being that if you're going to put your money into an account that has an umbrella over the top of it because remember if you put your money into these more restrictive items that themselves are not any more likely to make money than other kinds of investments. In other words if I have my money under the umbrella of an IRA, a 401K, a 403B or something like that I'm still investing in something like a savings account or like stocks and bonds and those are the same investments I could invest in outside of that umbrella and say for my retirement outside the only reason I'm putting them under the umbrella of some kind of tax thing like an IRA or something is because they're getting me a tax benefit and the cost of that is that I can't my money is now restricted. I can't get it out of there without getting penalized or something or having certain conditions that will be applied. So you might say well why don't I first max out the IRAs, the 401Ks, the 403Bs which are kind of more simple and possibly less costly investment tools that I could get a tax benefit from other than the permanent life insurance. However if I've already maxed those things out then it might make more sense to further try to max out the deferral benefits with the life insurance would be one argument and use it as a tax planning strategy with the permanent life insurance. So life coverage, so another touted benefit of permanent life insurance is that you don't lose your coverage after a set number of years a term policy ends when you reach the end of your term which for many policy holders is in their 60s while permanent life policies can cover you for life. If you anticipate people being financially dependent on you beyond the length of a typical term policy for example a disabled child this benefit may be attractive to you. So in other words often times the term policy might be sufficient right because I mean you're gonna people are gonna be dependent on you in your earnings years and hopefully your children will grow up and so on then and they'll be independent and so on but possibly if you have someone that's gonna be dependent on you for life then you might consider life the whole or the permanent. So you can borrow against the cash value is another argument if there's a cash value then you can borrow against it possibly if you need to. So if you need money to buy a home or pay for college you can borrow against the cash value of a permanent life insurance policy. Conversely if you put money in a tax advantage retirement plan like a 401K and want to take it out for the purpose other than retirement you might have to pay penalties. So if you put the money into a 401K you can't typically pull the money out until retirement unless you have a specific need whereas if you have the money in the life insurance possibly in a cash value you might not be able to pull the money out as easily but maybe you can borrow against it which is kind of essentially kind of pulling the money out that's kind of like how the government does it right. What do you mean we're not touching this fund which is borrowing we're just borrowing against the Social Security Fund right well that's the same thing but in any case further some retirement plans like the 457B make it difficult to or even impossible to take out money for such purposes so accelerated benefits you may be able to receive anywhere from 25% to 100% of your permanent life insurance policies death benefit before you die if you develop a specified condition such as heart attack, stroke, invasive cancer or in-stage renewal failure. So the upside of accelerated benefits as they're called is you can use them to pay your medical bills and possibly enjoy a better quality of life in your final months so it could be used kind of as that form of insurance. Again it gets a little bit confusing when you're using it in that way possibly though because now we're kind of packaging multiple things together and for multiple different reasons right so you would normally think well why don't I just buy a term life insurance for life insurance why don't I buy health insurance and possibly long-term care if I want long-term care insurance so I know what I'm buying and then why don't I invest in a retirement account to get my tax benefits there as opposed to that's what would be nice you can do unless you have certain strategies where you're saying well now I'm going to put my money into the permanent life insurance which has an investment component to it a tax saving component to it a life insurance component to it and possibly health care or long-term care kind of components to it so it gets a little bit confusing so you'd have to have significant advantages to do that in my opinion otherwise if I'm investing in something and I don't know why or what's going on or what my coverage is actually covered I'd like that to be as simple as possible so disadvantages while permanent life insurance can yield several benefits there are some potential downsides to keep in mind cost is one of the most important compared to term life insurance policies permanent life insurance can require you to pay higher premiums of course if it turns out that you don't need insurance coverage for life you may be paying premiums unnecessarily permanent life insurance could also have tax implications for yourself if your benefits if your beneficiaries if you decide to surrender a policy or you pass away with a loan outstanding and taking loans or accelerated benefits could reduce the death benefit that's paid out to your beneficiaries when you pass away frozen cons of term life insurance term life insurance could be a good investment if you don't want to leave your loved ones with the burden of paying off debt or other expenses you got the same kind of obligation now you're buying the life insurance simply for what the life insurance is there for so to help you out with your typically the typical scenario you have people dependent upon you possibly with your income stream and you want to be able to have that them be dependent on or have some resources there and or pay off any debt that would be possibly being able to pay off funeral expenses so here are some of the most important benefits of purchasing a term policy advantages lower premiums term life is generally less expensive to purchase compared to permanent life insurance that's because the insurance company assumes less risk since you're only insured for a set time period the younger and healthier you are when you buy a term life policy the lower your premiums are likely to be flexibility one advantage of term life insurance is that you can choose how long you want to be covered and you might say I don't know how long but you can get a pretty good estimate given the fact that we have life a standard life expectancy and when people are likely to be dependent on your income streams so if you think you only need life insurance for 10 years or 20 years you can choose a term that matches up with your needs that means you have predictability and estimating how much you'll pay in premiums over the entire term so if we know what the terms are you know what the premiums are you can get an idea of how much life insurance in general will cost you over the entire policy for example a permanent life policy on the other hand would be more of a guessing game since there's no fixed end date so obviously if you have permanent life insurance you don't know how long you're going to live and so on and so forth and it's also more complex you would think on the actuarial side when they're trying to calculate how much it would cost because they're taking into consideration you know life expectancy on that end as well so you can convert to permanent insurance if you decide you want to extend your term life policy indefinitely you can convert it to permanent life insurance coverage oftentimes doing so may increase your premiums but it may be a worthwhile investment if you want to have coverage for life converting could also give you the opportunity to accumulate cash value what are the disadvantages then of the term when you buy a term policy all your premiums go towards securing a death benefit for your beneficiaries term life insurance unlike permanent life insurance does not have any cash value and therefore does not have any investment component to me that's kind of an advantage if you can find other investments that are purely investments and basically have your life insurance be purely life insurance so that you know what you're doing each one of those things but again if there's significant tax advantages and investment advantages to have them mixed together then that might be worthwhile if you're still alive when the term ends the policy simply lapses and you and your beneficiaries don't see any money however you can think of term life insurance as an investment in the sense that you are paying relatively little in premiums in exchange for the peace of mind knowing that in the payment of your death your beneficiaries will receive a relatively large death benefit and that's again kind of the natural point of just life insurance if you are interested in a policy for a fixed period with a built in saving mechanism that rewards you for your payment later on a return of premium rop life insurance policy may be an attractive option you'll pay a flat rate for the duration of your policy but unlike traditional term life insurance coverage you'll get all your money back at the end of the term let's take a look at an example so a non smoking smoking is always that huge thing that's going to mess everything up so a non smoking 30 year old woman in excellent health might be able to get a 20 year term policy with a death benefit of 1 million dollars for 480 dollars per year so if this woman dies at age 49 after paying premiums for 19 years her beneficiaries will receive 1 million dollars tax-free when she paid in just $9,120 term life insurance provides an incomparable return on investment should your beneficiaries ever have to use it that being said it provides a negative return on investment if you are among the majority of policy holders whose beneficiaries never file a claim so again that's why it's kind of classical life insurance you're kind of insuring against something which you hope doesn't happen statistically low that it will happen but if it did it would be financially devastating not really to you because you'd be dead but to the people that are depending on your income and that's kind of the point you're hoping it doesn't happen you're paying for something that's statistically low probability but high financial damage so in that case you will have paid a relatively low price for peace of mind and you can celebrate the fact that you're still alive so permanent life insurance example what if the same woman described above had bought a permanent life insurance instead so for a whole life insurance policy from the same insurance company she could expect to pay $9,370 annually so how much cash value would she build up for that extra cost after five years the policies guaranteed cash value is $19,880 and she will have paid $46,850 in premiums after 10 years the policies guaranteed cash value is $65,630 and she will have paid $93,700 in premiums after 20 years the policies guaranteed cash value is $181,630 and she will have paid $187,400 in premiums but after 20 years if she had bought term for $480 a year and invested the $8,890 difference at an average annual return of 8% she would have $421,064 before taxes sure you say but the permanent life insurance policy guarantees its returns I'm not guaranteed an 8% return on the market that's true in other words you could say well make my investment basically somewhere else and possibly get a higher return however that return of course isn't guaranteed if you're investing in the market but even if the woman described above had put the extra $8,890 a year in a savings account with 1% interest she would have $196,425 after 20 years which is still more than the permanent policies guaranteed cash value of $181,630 is life insurance a smart investment? using permanent life insurance is an investment as an investment might make sense for certain high net worth individuals looking to maximize estate taxes estate tax planning can get quite complex with high net worth individuals trying to avoid the tax at basically death but for the average person buying term and investing the difference is usually the better option that's the general advice for basically most people that don't have advanced kind of tax planning needs possibly for more wealthy individuals is to basically do the term you know invest by the tools that are going to do the thing that the tools supposed to do life insurance buying life insurance for life insurance that's term investing for investing and using tax benefit tools for retirement such as the retirement plans and then buying insurance that's designed to ensure you for what you bought the insurance for health insurance Medicare when that comes into play and possibly long term care so even if you're purchasing life insurance primarily for investing purposes it's still important to research the best life insurance companies to ensure you're getting the most beneficial policy possible