Life Insurance Can Transform Your Future if You Know How to Use it

Welcome back to another episode of We're Talking Money. I'm Dustin Hocken. Today we'll be discussing everything you need to know about life insurance. We'll be talking about different types, different kinds. We'll also dive into some of the most common life insurance strategies, as well as the single most important factor when doing your life insurance planning. Stay tuned, we'll be right back.

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One of our 10 Elements of wealth management is risk management. This element is focused on making sure we have all the what-ifs in your financial plan covered. Well, one of those risks is: what if you pass away prematurely? This is an aspect of the financial plan that needs to be discussed in any solid plan. For most people, life insurance is something that you're going to need inside your financial plan. Now, it's not fun to pay the premiums every month or every year, but if something were to happen to you or your spouse, you're going to be really glad that you have the coverage.

Purchasing life insurance is shifting the risk of a premature death from you directly to the insurance company, and in exchange, if something were to happen to the insured while the coverage is in force, a large income tax-free benefit is paid from the insurance company.

Now that we know what life insurance is and we know why it's important, let's talk about the different types of life insurance. There are many different types and many different kinds and different features and riders of life insurance. I'm not going to spend time on all of them, but I do want to talk to you about the most common.

Let's start with term life insurance. This is the most widely used life insurance because it's very inexpensive. Now, you don't own this coverage. It won't last forever. Think about term insurance like renting the coverage. You pay a small premium, or you pay your rent, and you have coverage, but eventually, when you rent an apartment or rent a house, the lease runs out and you lose the coverage. Well, same thing with term life insurance.

Term policies will have different lengths of time, so some are five years, all the way up to, I've seen some that will last till age 80. Now, the ones that last to age 80, the premiums aren't locked in, and they will get a lot more expensive as you get older. So it's really important to discuss with your financial professional what type of life insurance is best for you.

Whole life insurance, so the second type of life insurance. This is more like buying the coverage, or owning the house. You pay a larger premium up front, pay a larger premium monthly, annually, but the coverage will last forever. This is a better solution if there's a permanent problem. Term insurance would be the temporary solution, and whole life insurance would be the permanent solution. Now, whole life insurance may sound really great, but it can be expensive, and sometimes the cost does not weigh the benefit. So again, it's very important to talk with your financial professional about if whole life insurance is right for you.

Second-to-die life insurance. This is a less commonly known life insurance, but it can play a really key piece in some people's financial plan. This coverage insures two lives, generally two spouses, and the death benefit is paid income tax free on the death of the second spouse. And so it's easier to get coverage. It costs less premium to buy this coverage. Generally we structure as a permanent product. At OmniStar, we set up this type of policy when we're looking to fund an irrevocable life insurance trust. We'll talk more about the specifics of this strategy later in the show.

Variable universal life insurance. This is where life insurance starts to get a little more complicated. A variable policy can offer permanent death benefit as well as cash value. The big difference between universal life and whole life insurance is whole life insurance performance is based off of an insurance company, where in universal life the policyholder gets to choose the investments they want to invest in.

A nice benefit of this type of policy is the premiums aren't locked in. So, for example, with a whole life insurance, you have your premium, and that's the premium you have to pay. Well, with variable universal life insurance, you can have flexible premiums. This can be good and it can be bad, because if you fall on hard times, you can pay less. But what happens if you pay less? A lot of times people continue to pay less even after they get back on their feet, and what that will do is it'll shorten the length of the policy.

Another difference here is whole life insurance has a lot of guarantees. Death benefits are guaranteed, cash values are guaranteed. Well, with variable universal life, none of that is guaranteed. This means if you stop putting as much premiums as you need to, all of a sudden the policy has a greater risk of lapsing and you losing your coverage. If you do have a variable universal life insurance policy, you really should think about ordering an in-force illustration probably every two to five years. It's one thing to have an in-force illustration from, say, five or ten years ago, but you want to make sure that that performance has kept up with how you thought it was going to perform.

The most important factor when discussing life insurance planning is making sure you have the right amount of death benefit. This may seem obvious, but this is a very common blind spot for a lot of people. Sometimes people start to spend so much time on the different types of policies, different riders you can add, that we forget why we're purchasing life insurance in the first place: for the death benefit, to protect our families. The amount of coverage should always be the first step in any sound insurance plan.

How much coverage do you need? Well, you should meet with the financial professional and run your goals and objectives through financial planning software. This will tell you the exact amount of coverage that you need. The most common objectives for traditional life insurance planning is one, to pay off all the debts, two, take care of the kids' future expenses like college, and three, replace some or all of the deceased spouse's income.

There are a lot of rules of thumb out there when it comes to how much coverage you should have, and you've probably seen some videos or read some articles. You might hear 10 times or 20 times your income, or maybe a factor of your expenses, and that is generally going to be pretty close. But term insurance is too affordable not to have the exact amount of coverage. You really should narrow it down to the dollar, so you can unequivocally know that everything's taken care of for your family.

Term insurance will make the most sense for a lot of people, because as you move through time, the hope is that your savings and your investments will increase and your debts will also decrease. As this happens, you hope that eventually you get to a position where you can self-insure. When you can self-insure, your financial plan will be successful even in the event of you or your partner's death.

Another strategy for using life insurance is when you have a very large estate. A lot of our clients at OmniStar have large estates and are susceptible to estate taxes. Life insurance can be a great tool for this. As a married couple, your estate tax exemption in 2023 is 25.84 million dollars. The estate tax rate in 2023 is 40. This means that any assets that pass in your estate above that 25.84 million are taxed at 40 percent. This can cause a major problem for beneficiaries.

This is especially a problem for your beneficiaries if your estate is made up of non-liquid assets, like a business. This could force your beneficiaries to have to short sell your business, for example, which means selling the business in a short amount of time, likely for a discount, in order to pay those estate taxes. Well, liquidity from life insurance can be a great solution for this.

With this situation, we purchase a second-to-die life insurance policy that we were talking about earlier. We take the policy, we place it inside of an irrevocable life insurance trust, or ILIT. The ILIT will be the owner, the payer and the beneficiary of the life insurance, so all the proceeds are removed from the estate. When the second spouse passes away, there's a death benefit that's paid income tax and estate tax free to the beneficiary to help cover those estate taxes.

It's a much less expensive and much more effective strategy to use second-to-die life insurance for this type of problem. I have seen other types of life insurance inside of ILITs in the past, and sometimes that doesn't ensure that the problem's taken care of. A certain problem requires a certain solution.

These are only a few situations where life insurance can make sense. There are many other situations where life insurance can be the solution for a problem in your financial plan. Life insurance can be a Cherokee subject. It's not something that people want to think about, but it's much worse to not plan for this at all. There are so many different types and kinds of coverage. Please be sure to review your contracts to make sure that you have the most effective coverage for your situation.

As always, if you have any questions over your life insurance planning, the professionals at OmniStar are here to help. If you liked today's video, please be sure to subscribe to our channel right now. We appreciate it, it helps our channel grow, and it helps you stay better informed. You can also follow us on Facebook, Instagram, LinkedIn, and of course our website, www.omnistarfinancial.com. Thanks for watching, and we'll see you next time on We're Talking Money.

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