Episode #2: Purchasing Life Insurance: Which Policy Is Right for Me?

So you're looking to purchase a life insurance policy, but not sure which policy to choose. Whether it's term or permanent, you will want to understand the fundamentals between the two categories. In this episode of Money Script Monday, Kevin Nuber reviews the differences between term and permanent life insurance and the benefits that are associated with them.


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Video transcription

Hello, everyone. My name is Kevin Nuber. Thank you very much for watching today's "Money Script Monday." What I'm going be talking about today is “Purchasing Life Insurance: Determining What Policy is Right for You.” One of the really confusing things about purchasing life insurance is that there are dozens and dozens of different types of policies that you can purchase. And any time a consumer is bombarded with an abundance of choice, it becomes extremely difficult to figure out exactly what you want to buy. So the purpose of this video is to simplify things a little bit so that you can quickly determine what type of policy you're looking for.

Types of life insurance

Let's say that you're going to buy something, anything, really. It doesn't have to be life insurance. Let's say... I'm going to buy a TV. I'm going to do some research to figure out what company's a good company, I'm going to find what I want, and then I'll look on the internet and find the cheapest place that I can buy that specific thing that I'm looking for. And whoever's selling it the cheapest, that's where I'm going to buy it from. And that's how we're all conditioned, as consumers, to buy things. And this is certainly true for life insurance, but not for all life insurance. And so I want to make sure everyone understands what type of life insurance this works for and what type of insurance this does not work for.

Type of Life Insurance

So first off, let's just start off by saying that...assume, hypothetically, that you're looking for $500,000 of life insurance. So $500,000 of death benefit. This is the stated amount of insurance that you want. Well, it's really easy to go online or go anywhere or talk to an insurance agent and find the cheapest $500,000 policy that you can possibly find. And if this is what you're doing and this is how you're looking for life insurance, there's nothing wrong with that. It's just that there's a specific type of insurance that you're looking for, and that's term insurance.

Term Insurance

Term insurance is the cheapest amount of premium that you can pay for a stated amount of death benefit, and that's represented here by the minimum line. This is the minimum amount of premium that you can pay for $500,000. So the question I have to you is, who determines that minimum line? And it's simple. It's the insurance company. They get together in a room, they get out their calculators, and they figure out what's the amount of premium that we need a person to give us to be able to offer them a certain amount of insurance? And they determine, "Hey, $500 is what we need."

So for this example, let's just assume that an insurance company has determined that this minimum line is $500. Now, this is term insurance. There are many other types of life insurance that exists out there other than term insurance, so why would anybody buy or spend more than the minimum amount of premium on a life insurance policy? And that's a really important question. I'm not going to buy the most expensive price of a TV that I'm looking for, so why would you do the same thing with life insurance?

Permanent Insurance

So let's assume this maximum line is $10,000, and you paid $10,000. Well this type of insurance is a permanent insurance policy. There are many types of permanent insurance policies out there. They all work the same in that all the extra money that you're giving to that insurance company is going to get a list of benefits here, which we're going to talk about in more detail.

Benefits of a max-funded, permanent life insurance policy

Benefits of Permanent Life Insurance

(1)Tax-Deferred Growth

That extra money that you're paying into that policy is going to grow tax-free. That's something you can only find in things like Roth IRAs or IRAs, and it's also true with life insurance.

(2)Tax-Free Distributions

This a really important one because the money you take out will be tax-free as well. That's something you cannot find in something like a 401(k), and it only exists with life insurance.

But that's why the government limits how much money you can put in there. If there was no maximum amount that you can pay into life insurance, then everybody would just put all their money into life insurance because of those tax benefits. In fact, in the 1980s, there was no limit on how much money you can pay into life insurance. Clients were putting billions of dollars every single year into life insurance, and very powerful institutions started catching on to the fact that insurance companies were getting money. Wall Street, big banks, and the IRS all became very concerned that money was going to the insurance companies, and it was going be all completely tax-free.

So the government got together, and they determined this maximum line. And they said that, "Hey, for this $500,000 of death benefit, the most that you can pay is $10,000 and still get all these benefits." Now, technically, you can pay more than $10,000, but for the most part, we don't ever want to do that. Because if you do cross over this line, now what happens is you lose number two over here, which is tax-free distributions, and now your insurance policy is going be taxed like an IRA and a 401(k). And for the most part, we don't want that to happen.

So if you're looking for a maximum-funded policy with all the benefits, then we want a permanent insurance policy, and you want to pay all the way to the maximum line. Now, remember, in-between the minimum and the maximum, there's really an infinite number of ways in which you can structure a premium payment and what-not. But the general rule of thumb is the closer you get to this line, the more benefits that you'll receive.

(3) Comptetive Returns

Now, there's many different types of permanent insurance policies out there. There's Whole Life (WL), Index Universal Life (IUL), Variable Universal Life (VUL), and some can provide you more competitive returns than others. This is the part where you need to look for when determining a policy, but they all can give you competitive returns.

(4) High Contributions

Unlike a 401(k) or a Roth IRA, which limits the amount of money that you can put in any given year. For the most part, for most people, there's no contribution limit or very high contribution limit for a life insurance policy.

(5) Additional Benefits

These include long-term care,chronic illness, critical illness, and critical injury insurance. What this means is that, if something happens to you while you're alive, the insurance company is going to send you some of your death benefit while you're still alive if you become chronically, critically, or terminally ill.

(6) Collateral Opportunities, (7) Safe Harbor, and (8) No-Loss Provision

This allows you to post your cash value's collateral in order to borrow. This is more of an advanced concept, but it is something that you can't necessarily do with other types of retirement accounts. It provides you a safe harbor to grow your money with no risk, and it gives you no loss provisions. So, for example, if you have an Index Universal Life policy, you can participate when the market goes up, up to a limit. However, when the market goes down, you're not going participate in that loss. You're just going to earn a 0%. So this no loss provision is extremely important.

Grow your money with no risk, and it gives you no loss provisions. So, for example, if you have an Index Universal Life policy, you can participate when the market goes up, up to a limit. However, when the market goes down, you're not going participate in that loss. You're just going to earn a 0%. So this no loss provision is extremely important.

(9) Guaranteed Loan Option

If you become medical impairment, if you lose your job, you become disabled, and now you need money, you can go and take loans from your insurance policy and you don't have to qualify to take that loan. If any of those things happened to you and you had a bunch of equity tied up in your home and went to the bank and tried to take some of your equity out, you'd have to prove your ability to pay that back to them. And if you can't because you lost your job or you're disabled, they're not going to give you your equity. That's not true with life insurance. They're going to give it to you. There's no qualification to get a loan from a policy.

(10) Unstructured Loan Payments

The loan payments are completely unstructured so you determine how much and when you're going to pay back the loan. Sometimes, you don't ever have to pay it back, but if you do want to pay it back, you determine the payments. It's completely up to you, unlike financing a car or paying a home mortgage where you can't miss a payment.

(11) Liquidity, Use and Control

You determine the amount of payment you'd like to pay in, you can skip them, you can skip payments, it's easy to do, and you can take the money out when you need it.

(12) Deductible Contributions

Now, these 11 benefits are great, and it would be even better if we can get all 12 benefits, but you simply can't get all of these at the same time. You cannot deduct the premiums that you pay in for life insurance, so you do not get this last one. But in our opinion, it is perfectly reasonable to get these 11 things, which you cannot find in any other place that you can put your money in exchange for not getting the deductibility of premium payments.

I hope this quick lesson on how life insurance works gives you a better idea about the different types of insurance that you can purchase. So if you're looking to solely have a death benefit protection, you may want to consider buying a term insurance policy. However, if you're looking for a financial vehicle that can provide not only a death benefit protection, but a myriad of other benefits including tax-deferred cash accumulation growth and tax-free distribution, I would recommend looking into some sort of permanent life insurance policy to fit your needs.

By watching this episode, you now you know more than 95% of the life insurance agents out there that are actually selling life insurance. Thank you for watching and have a great day.

About Kevin Nuber

Kevin Nuber is the Vice President of Field Support at LifePro. He coaches hundreds of financial professionals on how to build effective financial strategies that achieve their clients' long term goals and helps them stay educated on the latest industry trends.