Life Insurance Explained

Today's Newsletter:

• Quote From Robert Arnott

• Life Insurance Explained

• Life Insurance Myths

• A Money Question

Quote

“In investing what is comfortable is rarely profitable.” - Robert Arnott

Investing is a game of controlling emotions. Time and time again you will be reminded of doom and gloom scenarios. Those that ignore the noise, stay the course, and stay invested have come out ahead throughout history.

Life Insurance Explained

I love discussing things that I have had personal experiences with. Life insurance is certainly one of those topics. It is one of if not the most misunderstood topics in all of money management. The reasons for this are quite simple. It is a product that promises tax-free money (everyone likes that) and it is highly profitable for the agent selling it (a lot of people want to sell you it). That said life insurance in the right form can be a great tool. Let’s dive in!

In the simplest context, there are two major forms of life insurance, term and permanent.

Term Life Insurance

Term life insurance is a product that goes on for a certain period of time.

Example: If you buy a 20-year term policy for $1,000,000 it means you will pay a fee (premium) each year for 20 years. If you die in that time period your family (beneficiaries) will get $1,000,000.

Term life insurance is a great product and something that a large majority of the population should have. It transfers a family’s biggest financial risk to the insurance company for pennies on the dollar.

The most common types of term policies are 10, 20, and 30 years. A great starting point is determining how long you want coverage and then deciding how much coverage you need.

Permanent Life Insurance

Permanent life insurance is a product that lasts your entire life, assuming you pay the necessary fee (premium).

Example: If you buy a form of permanent life insurance, there is a certain amount of money you will need to put in to fund it. Whenever you die, your family (beneficiaries) will get the death benefit.

Permanent life insurance CAN BE a great solution if you have a need. The most common need my clients have for permanent life insurance is estate taxes. Yet, as of today, you need to be worth more than $12,920,000 to have that issue (not so common). There are other use cases such as illiquid investments, business interests, and legacy planning. All of these use cases are reserved for hyper-specific situations that should include complex planning prior to buying.

While there are great use cases, the majority of families I see have no need for permanent life insurance. The reason for that is simple. It is expensive and often not the most efficient use of your money. Yet, it is sold to the majority of families I see. Again, the reason is simple. Insurance agents make a lot of money on permanent life insurance policies. In fact, several large “financial firms” require “financial advisors” (loose term) to sell a certain amount of life insurance before they can do anything else.

Here is a visual breakdown of the layers of costs that go into permanent life insurance policies:

Again, permanent life insurance CAN BE a great planning tool. If you choose to buy a permanent life insurance policy, here are a few recommendations:

• Have input from someone on your financial team that is not getting paid on the product

• Ask for a full breakdown of costs, including all commissions

• Be aware that the projections shown are usually inflated

Life Insurance Myths

“Term insurance is a waste of money.” “Life insurance provides great investment returns.” “You will get so many tax benefits.” “You should use it to pay for college.” “The richest families in the world use it.” The number of things I have heard proclaimed to sell life insurance products is staggering. Most of them are some form of a half-truth combined with a false reality. Let’s dive into some of the most common myths of life insurance.

1. Myth: Term life insurance is a waste of money.

   Term life insurance is a product that nearly every family should consider. It allows you to transfer your greatest financial risk to someone else for pennies on the dollar.

2. Myth: Permanent life insurance provides great investment returns.

   Every year you will see big insurance providers talking about their record dividends. This is the money they pay out for many permanent life insurance policies. The problem with that is the dividend (what you receive) is only on the cash value, not the entire premium. Much of your premium goes to overhead, fees, and commissions.

3. Myth: Permanent life insurance is a great tax reduction tool.

   Yes, the proceeds of a life insurance policy are given to the beneficiary tax-free. Yes, you can loan yourself money tax-free from our policy but not interest-free. Let us not forget that every loan you take is tax-free. In addition, there are no tax benefits for contributions.

4. Myth: Permanent life insurance is a great way to pay for college.

   Nearly all permanent life insurance policies provide a near negative rate of return for the first decade. Taking that money instead and putting it in a 529 gives you a current-year tax break and increased return potential.

5. Myth: The richest families buy permanent life insurance so you should too.

   Yes, wealthy families buy these products. They are solving for a need in their estate planning. 99% of the population does not have that same need. You have to remember they are playing a different game than the large majority of the population.

   If you get anything out of this week’s newsletter, remember this. Life insurance is a tool to solve a need. If you have a need or want to transfer risk, life insurance can be a great tool. It is not an efficient investment, your own bank, or some elaborate tax strategy.

A Money Question?

“What is risk?”

I love this question because on the surface everyone has an answer. It usually stems from a personal experience when the unexpected happened. It is fitting for this week’s edition. Risk to me is what can happen after you have accounted for everything else.

Always remember my friends, money is a tool that is meant to be used.

Work with Jacob

I help athletes and entrepreneurs pay less in taxes, coordinate their financial life, and invest for the long run.

 JL Strategic Wealth Discovery Call

Until Next Time, My Friends

JL Strategic Wealth, LLC is a Registered Investment Advisor, located in the State of Missouri. JL Strategic Wealth provides investment advisory and related services for clients nationally. JL Strategic Wealth will maintain all applicable registration and licenses as required by the various states in which JL Strategic Wealth conducts business, as applicable. JL Strategic Wealth renders individualized responses to persons in a particular state only after complying with all regulatory requirements, or pursuant to an applicable state exemption or exclusion. Nothing in this content is intended to be, and you should not consider anything in this content to be, investment, accounting, tax, or legal advice.