Reasons You SHOULD Get Life Insurance

Plan With The Tax Man

Sure, life insurance is one of the more boring topics to cover on a podcast. And a lot of what you hear is going to warn you why you should NOT get various types of life insurance. But our goal on this episode is to focus on the positive and analyze the reasons why you should get life insurance, or at least consider it. Many people think that once the kids are out of the house, you don’t need insurance anymore. But there are some other reasons why life insurance can be a useful part of your retirement plan.

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Transcript Of Today's Show:

Host: Hey, everybody. Welcome into another edition of Plan With The Tax Man. It's Tony and myself, hanging out, talking about investing, finance, retirement and life insurance. Don't turn off the podcast just yet. I know life insurance can get a little boring, but these are reasons maybe you should get life insurance. And a lot of what you're going to hear out there is warning you why you shouldn't get life insurance. But our goal on this episode is to really just focus on some of the positives and analyze the reasons why it could be beneficial to at least consider it anyway, because we tend to think of things that, especially with life insurance, we have a narrow frame of that sometimes. So that's the topic today. Tony, what's going on with my friend? How you doing?

Tony: I've been doing well, getting into the warmer months now and excited to get outside and be outside.

Host: Yeah. It's late April now, as we're dropping this podcast. So it's definitely nice to have hopefully, fully Spring as we get ready to turn into May here, pretty quickly. But Tony, life insurance, we tend to... I always love that joke, why they don't call it death insurance? Well, because nobody would buy it, right?

Tony: Yeah. That's right.

Host: Doesn't sound very good. But we tend to think of it like, "Okay, I'm in my thirties, I've got young kids. If I get in a car accident and injured or die or something like that, that way things can get paid for." Income replacement, so we don't tend to think about it as a retiree. We go, "Well, I don't really need that stuff anymore." But it still could be a tool for income replacement even for a senior, because we're still going to lose a spouse at some point.

Tony: That's right. And I love talking about life insurance, even though, like you said, a lot of people turn their nose up at it, and it is so useful of a tool. Whenever we start a financial plan for somebody, we have to know if they're covered or not and try to educate them a little bit about it, because as you said, people tend to get that feeling of, "Well, I should just buy a term and invest the difference." There's been firms for years have been touting that, but you look at most people with any type of, toward the end wealth, they've used life insurance in some form or another to its fullest benefit. But income replacement is one of them, because a lot of people just think, "Well, I'll buy some term and if I die, then my spouse will obviously get the proceeds and she'll be able to pay off all the bills."

Tony: But what they don't think about is the income replacement, which we try to talk to them about. Because if you're 40 years old and you're earning $100,000 a year and you all of a sudden unexpectedly die, that $100,000 a year, that income would probably need to be replaced or at least a portion of it, because the spouse that's still living is going to... You've adjusted to a certain lifestyle and how are you going to make that up? Yeah. And so, it's important to talk about that when you're talking about life insurance, not just paying off bills, because as you said too, I tell my wife this, at some point, one of us is going to be alone. We just don't know when.

Host: Yeah.

Tony: And it's going to happen. And so, we want to make sure that if it does come earlier than expected, that we can get some of that income replaced so the other living person doesn't go backwards in not only your lifestyle, but-

Host: Yeah. Even as a senior, because it could be, if you didn't select the spousal option on a pension, if you were lucky enough to have one or social security benefit, whatever, we only get one, we don't get both of them when the other person passes. So we get the higher of the two. So again, it could be a tool to use for income replacement, even as a retiree. What about estate liquidity, Tony, from that estate standpoint, maybe there's a lot of taxes that could be involved. Life insurance could help with that too, correct?

Tony: That's correct. Because state liquidity is extremely important, especially if you've got things that you're going to owe a lot of tax on. And here in the Midwest, you think of farmers that, the land has been in the family for a long time possibly. And there could be a lot of capital gains due. Now, there are some tax laws, the other steps up and basis and all that, which we won't get into, but it could be needed to cover taxes that the estate and/or the heirs are going to be responsible for now. In these parts, with the estate tax exclusions being so high, it's not as prevalent used for that, but I have a client that's well above that and we're doing all kinds of things with trust and using life insurance to hopefully pay those estate taxes. So the rest of the money goes to the heirs. So it's definitely needed for that. That's one of the biggest uses that I see.

Host: With the life insurance, yeah.

Tony: Oh yeah.

Host: So I'm going to hop around, because I want to keep it with that same topic of the family and the estate. So I'm going to go to number four actually on my list here, which is transferring family wealth or maybe using it for a generational tool. We talked on the prior episode when we were doing the birthdays, that there's changes now with RMDs and things of that nature. And if you've got a 401k and you leave it to your heir, we've talked about the removal of the stretch IRA. So life insurance could be a way to build generational wealth, yeah?

Tony: Yeah. Well, it could, because with the elimination of some of those things and with the right types of planning, you can leave your beneficiaries all this money, and it's simplest form, it's all tax free to the beneficiaries. A lot of people don't know that.

Host: That's a great tool.

Tony: Yeah. What a great way to leave them money, especially if you use some of the trusts and some things like that, and you maximize your estate tax exclusion. Because some of these states that are rather large, they're going to need some sort of life insurance to either help pay the tax or provide for the errors and then use the estate money to pay the tax, one of the two. But again, when you're starting to build wealth, this stuff can become extremely important, but especially for the transferring of the wealth. But the easy one is yes, the proceeds are tax free.

Host: Yep. Got to like that. All right, Tony, you're a business owner. So business succession, that could be another one. So let's just hypothetically, you and I own a business together and one of us passes. Well, having life insurance could be a way that your spouse... Or the other business owner, excuse me, uses that money to buy off the spouse from the person who passed away, correct?

Tony: That's correct. Yep. And I have two younger brothers and we own some businesses together and that's exactly what we have. We have a lot of real estate in them and we have a buy/sell and the buy/sell is funded with a life insurance policy on each of us, because, we have decided, well, we need to buy out the spouse. And we are all in agreement that we love our spouses, but the other people don't want to be in business with the spouse. And so, the idea there is to, well, for relatively inexpensively, we can fund these life insurance policies. If something happens to one of us, the spouse gets the value of the proceeds, again, tax free, and they don't have any rights to the business. So a lot of things are accomplished there. So it's something though, that I see a lot of businesses that we work with on the accounting side, that if they have partners, they haven't even thought of it. And they need to start talking about a succession plan by/sales, funding it with life insurance, because it is inexpensive to do it that way.

Host: Mm-hmm (affirmative).

Tony: And it prevent a whole lot of problems down the road with spouses and things like that.

Host: Yeah. Because they may not want to be involved. They're just like, "Hey, buy me out. I'm done", whatever the case might be. So again, it could be a useful tool when we're talking about life insurance, a lot of little extra ways, not just, I've got the basic insurance that when I pass something happens, my family get it's the death benefit or whatever. There's lots of other little nuances that you could use it for. Similar I guess, in thought but still, they can go towards different things, business being one of those. Now Tony, we'd be remiss if we didn't bring it up because we see these commercials, we hear these ads. There's all this stuff out there, use life insurance for a tax free income, in retirement and this is not dying. They're marketing as, "Hey while you're alive, get a tax free income through insurance." So can you tell us a little bit about, what is it they're saying, what is that all about?

Tony: So a lot of people don't favor the cash value life insurance policies today, but they can be a useful tool to provide, not only of course protection, but some cash, or a tax free income, because the idea there is you're paying more premium in dollars than what you're buying in life insurance. And the extra goes into the cash value, starts building up over the years and there could be some great tax advantages to use that cash value as a supplement to tax free income. It's probably not the end all depending on how much you've got in there, but there are certain policies that still build up relatively good cash value-

Host: Okay.

Tony: That you can take out while you're living and basically use it. Now, you have to understand the rules and everything that goes with it. But a lot of people don't look at it like that. They just think, "Well, that's overpaying. That's not a good deal." But once you take a look, it's not too bad. I have one myself and I happen to have one that's a participating dividend paying policy, but I don't know, it's got quite a bit in it, cash value. I've pulled it out a couple of times to basically, buy something. And then I pay myself back, which I love because I'm using my own money. I don't have to rely on a bank. Right. And in my case, they tr treated it like it never left. So I continue to earn my little dividends, but there's some things you can do with some of those. So it's definitely worth a look there.

Host: And that's the point of the conversation of the podcast this week is, there's different little nuances that can be done, but again, you need to talk with a qualified professional because just like everything. Look, every tool's not for every situation. And the elimination of every tool, if you're a repairman shows up and he just has no hammers in his toolbox and he needs a hammer, well then that's not going to be good. Anybody who's ever tried to hammer something with the backside of a Crescent wrench knows that's not the greatest tool for hammering. You want to have the proper tools. So again, sometimes people will hear certain things and they'll just shut down immediately, because, "Well, I don't need life insurance." So these are just some other little ways that it could be, or should be something to at least ponder. Now, long term care is on my list as well. Tony, obviously that seems like a no brainer, something maybe with an accelerated death benefit, something like that we hear a lot about for helping with those healthcare expenses.

Tony: We do. And I think people need to look at life insurance for that, because of the cost of long term care insurance, which I am a big fan of, so to speak. I think you need to at least take a look at that as part of your financial plan. But a lot of times, if people wait too long, the long term care coverage may not seem like it's affordable. And a lot of these life insurance policies have long term care coverage or writers on them that you can access this money while you're still living. Now yes, it does reduce the death benefit, but you can use it for long term care. So you can feel like, "Well, at least if I needed to go in, I've got some coverage there.

Host: Right.

Tony: And it might be less expensive than a traditional policy. But again, got to do some looking and make sure you're comparing apples to apple with benefits, things like that. But it is there, which is a great tool again, like you said.

Host: Yeah. And of course it can help with some of the healthcare expenses while you're still around, but then also provide that death benefit as well. So again, different options, different nuances, lots of little things in there that can be a useful tool. So don't just eliminate something, just because you've figured that at a certain age I don't need or whatever stigma you might have with something. And so, that's going to be it this week, keep it short and sweet. Just talking a little bit about life insurance and reasons to ponder it, at least. And if you've got questions about how it might be helpful with your estate or how it might be helpful with transferring family wealth or growing family wealth or business succession or whatever the case might be that we talked about, definitely reach out and talk with a professional before you take any action.

Host: Tony is an EA and a CFP. So he's been doing this quite a while, helping families get two and three retirement, and you can reach out to him online at yourplanningpros.com. That's yourplanningpros.com. Don't forget to subscribe to the show on whatever platform you like to use. While you're there, you can find all that information. Also, we're on Apple, Google, Spotify, iHeart, Stitcher, and so on. This has been Plan With The Tax Man, Tony, thanks for hanging out, talking a little life insurance and I'll let you get back on with your day.

Tony: All right. We'll talk to you soon.

Host: I appreciate you. We'll see you in a couple of weeks as we move through May and we get sir two Memorial Day. So have a great one. We'll talk to you soon, here on Plan With The Tax Man, with Tony Mauro.

Disclaimer: Securities offered through Avantax Investment ServicesSM. Member FINRA, S.I.P.C. Investment advisory services offered through Avantax Advisory Services. Insurance services offered through an Avantax affiliated insurance agency.