Speaker 1 00:00:08 What's up, everyone. Welcome to the finance for physicians podcast. I'm your host, Daniel Raimi. Join me as we dig into what it looks like for physicians to begin using their finances as a tool to live better lives. You can learn more about our
[email protected] let's, jump into today's. So what's up guys. Hope you're having a great day. Uh, before we jump in today, I wanted to share two things. I need your help on number one. Uh, I've been kind of thinking about the format that we're doing with this. And I was, I was curious what you guys think, you know, I've tried out like the, uh, interview type setup where I have a guest on I've also done done somebody. So podcasts for a few of the past episodes. I'm also thinking about doing like a Q and a sort of a format. Um, I don't think I've actually tried that specifically, but, um, I'm curious what you guys think about which format you like the best, you know, do you like, like to have the guests on to kind of hear, uh, stories from, uh, you know, the experts or maybe even just stories from like real world, um, you know, physicians and kind of in practice or in residency and kind of going through the challenges themselves, or maybe, maybe you like the, uh, the solo podcast, just to kind of focus in on the educational content or maybe the Q and a format sounds appealing.
Speaker 1 00:01:28 I, you know, the Q and a format, like I said, we haven't tried that yet, but the that's kind of like the traditional radio radio show format, you know, you get callers that call in and they're calling, you know, calling them with just questions. Um, and we can kind of cover those as they come in. Um, I think the way that we would do that. So the second thing I was going to ask you is related to this Q and a format. So we're going to try some of those in the future. And so, um, the way that we're going to do that is we have set up a, uh, tool on the website that's really easy to use. And it's a way for you to basically just click a button and can record a question and that'll get kicked over to us. And then in a future show, when we, uh, cover the Q and a we'll pull that in, and then we can just talk through your specific question.
Speaker 1 00:02:14 So if you have specific questions, you'd like us to cover, it will be in the show notes. You can also find it at finance, for physicians.co/contact. All you have to do is click the button that says start recording, and then just give it a little snippet about who you are if you want to share that, if not, it's all good. And then just throw out your question. And so we'll, we'll cover that in a future episode and take a few of those and, and make that the topic. So, um, so yeah, two things, first thing is, uh, in general, what sort of format do you like best? We'd love to hear your feedback on that. And then the second thing is if you have specific questions, please ask those, uh, by clicking the link in the show notes, or going directly to finance for physicians.co/contact, and you click that, start recording and just throw out your question.
Speaker 1 00:03:02 So there's a lot of different topics we can cover. I kind of tend to like talking about all sorts of things, but I want to make sure it's interesting and relevant for you. So that that's definitely the most important thing. So let me know what you think. So today we're going to talk a little about life insurance. Uh, I'll try to make it live. Insurance can get a little boring. Uh, so I'll, I'll try to make it a high level and, um, I'm going to try to stay out of the weeds and, and make it as interesting and also educational and, uh, and informative as possible. So I actually, uh, started my career working in the life insurance industry. I started for a big life insure Northwestern mutual, um, right out of college. And I ended up staying with him actually for over, um, eight years.
Speaker 1 00:03:48 And so in, in that time, I learned quite a bit about, you know, how life insurance products work and kind of how the industry works. Uh, they also had a really good training, especially around how people think about it and even how to sell the products. And so I learned a lot about how that works. And so some of that is probably not relevant for you, but, but other parts definitely are. And I'll, I'll try to kind of extract out those parts and share those definitely in this, uh, episode. So I'm definitely excited to get into that. But what I also learned in working there is there's all kinds of conflicts within the industry, especially when you start to become like the combo advisor slash insurance agent, or maybe you just even are an advisor only, but you also happen to be selling the products or air quotes recommending the products.
Speaker 1 00:04:43 And that's actually what ultimately drove me out of the industry. I think that's where a lot of the industry is going is over the years I became, you know, I moved from being just an insurance agent to, uh, an advisor and I, you know, that's how my clients saw me, but we also happen to sell those products, life insurance, being the main one, uh, to make a living. So, so I'll share kind of what you need to know about, about how those work and what to look out for. They're not always bad. It's just, I think understanding those conflicts and, uh, look kind of looking out for them is, is really going to be helpful. Um, and just FYI, um, I don't sell any of those products anymore, so you don't have to worry about, uh, that angle coming out in this post. So, um, so first of all, life insurance is one of those things.
Speaker 1 00:05:37 Um, well, I don't know unless you're me, I mean, as a financial planner by profession, we can attend to think about this type of stuff all the time, but unless you're like a financial planner or you just kind of nerd out on this stuff, you probably aren't thinking about it all the time. And maybe it's a extremely rare topic. So odds are, it's going to be like a really long time, you know, before you need it. Hopefully it's a really long time. And, but you don't know that for sure. And I think that's the real reason you get it is because tomorrow, ultimately tomorrow is never guaranteed. You got to plan as if today could be your last day. Uh, and if that were to occur, you never want to be in that position where you leave your loved ones in like a financial pinch.
Speaker 1 00:06:21 That's kind of the, the scenario that everybody would fear for. And, and that's what we're trying to avoid. But the key is you got to do it when everything is good. And a lot of times there is no urgency when things are good, but you, you have to really kind of force that yourself or have someone like us. That's a lot of times what we do with our clients, we have to kind of force this topic to the table and help people to think about it. But you gotta kind of force yourself to, to, to think about this scenario and, and ultimately create some urgency when it would have otherwise not existed so that you can get it done, even though everything is good, because that's the time to get it done is when life is good, health is good. It's extremely unlikely. It's probably not going to be very far.
Speaker 1 00:07:06 It's probably going to be a long time in the future, but you never know. So the cost for many of you, uh, not having coverage when you need it is, is extremely high. So the good news is though for, for, um, for most people, probably listening is, you know, that risk of it happening is extremely low. So this, this is like the ideal. If you've, if you've studied insurance before like me, um, you kind of learn this in the basic stick. The ideal case for insurance, uh, in, in, in a planning application is when the risks are extremely low, but the costs are extremely high or the potential costs are extremely high. So covering your, uh, life or your earning potential, um, covering that lost earning potential in the event of unexpected debt. That's a classic use case where insurance works extremely well because when you're young and healthy, the risks are very low, but the cost in the form of lost income is extremely high.
Speaker 1 00:08:10 So that's, that's a classic use case for where insurance works extremely well for a large amount of people. Oftentimes though it takes a trigger to think about it. That's I think how most people are like my situation I shared, uh, on the show a few weeks back, uh, tomorrow's never guaranteed was the title, but I had a kind of, a little bit of a health scare. And it forced me to think about, uh, this sort of thing. Fortunately though, I have adequate coverage and I've done the planning, my wife and I have kind of gone through this exercise. But if I didn't though, there's a really good chance. I think new coverage at this point would be a major challenge and maybe even be impossible to get because of that, uh, health, uh, issue popping up. And so, you know, insurance companies want to understand the risk before they offer you coverage.
Speaker 1 00:08:57 So that's kind of goes what I was just saying, low risks for it to work well, they have to be confident that it is a low risk for them. And so if their health issues, sometimes unfortunately, you know, you have health issues and that kind of changes the game a little bit. And so insurance companies, a lot of times aren't going to offer anything at all, especially if it's something that, uh, you know, increases your chances of death or is just a kind of an unknown thing. So ideally, um, you know, I want to make sure you're in the position to not have to worry about it. And that's definitely important. And ideally you have kind of game plan ahead of time so that if something were to happen, you know, it's not just an added stress and, you know, your family is well taken care of, and that's just kind of going to make life a little bit less stressful and potentially make a massive difference is, you know, in the unfortunate situation where something were to happen sooner than expected.
Speaker 1 00:09:51 All right. So let's jump in. So before we get into understanding the products and how they work, because I'm going to talk about kind of the, the product setup, um, just kind of a high level of what's, what that looks like and maybe how to navigate it. But I think before we, uh, get into that, I I'd say it's good to understand a little bit about how the industry works. So I think the first thing I would point out is if you're an insurance agent selling life insurance, the first thing you learn is it's almost shocking when you see the numbers, but they pay big time commissions. Uh, it's a high percentage of the premiums. Uh it's it's almost like how do they afford to pay you that? Um, so for example, um, you know, like you sell someone a thousand dollar a year policy, a lot of times you're going to get paid 100% of that in the first year.
Speaker 1 00:10:46 So a thousand dollars is the commission. It's, it's usually 50 to 100% on average. So maybe 500 to a thousand and they, a lot of times pay it to you upfront in one payment. And so if the premium is $10,000, you might be getting paid five to $10,000 upfront, you know, in a pop just by them signing up for the product. So, uh, it's also difficult to sell. So, you know, that's kind of the way the market works is when something's difficult to sell, they have to pay higher commissions, uh, for people to sell it. You should keep that in mind, I'll circle back to that, uh, throughout this. But, um, it's, there's a lot of commissions built in. And so that's just important to understand it doesn't necessarily make it bad. Uh, McCann caused some issues, but the second thing, there's a lot of money in general, like a ton of people buy it a lot of times for good reasons, not always, but there's just a lot of people, most people own some form of life insurance.
Speaker 1 00:11:42 So there's just a whole lot of money in the industry. And the industry itself has tons, tons, and tons of money. And so there's a lot of people, a lot of incentive there, uh, within the industry to kind of, um, push you towards owning more of it. Maybe when maybe for good reason, maybe for not another big thing. That's important. I already kind of hinted on with my experience. There's big time conflicts, uh, with the people that sell it, whether they're an advisor, like selling it on, you know, behind the scenes or just, you know, an agent there is some conflict there. Um, I think the biggest conflict exists when their advisor and air quotes that it's not quite obvious on the surface that they sell insurance and they're an insurance agent, but, um, if they are taking you through the process of purchasing insurance, that means they're an agent.
Speaker 1 00:12:36 So a lot of advisors that are kind of acting in this capacity, uh, because of the negative connotations that come with being an insurance agent will a lot of times just kind of leave that off. Um, you can also look on their websites. They'll typically say like if their insurance license, uh, so when someone is acting as an advisor and an insurance agent, uh, that kind of amps up the conflicts. Now, if somebody's just an agent only, which there's not as many of those nowadays, but like a pure agent, uh, that there's a little bit less conflict there, but an advisor agent. So I already mentioned, you know, they'll typically call themselves an advisor they're oftentimes going to want to use the financial planning process to earn trust and also kind of make the case or find the need for selling the product that they sell.
Speaker 1 00:13:24 Uh, their recommendations tend to be pretty uniform across the board. If you, I mean, that's hard for you to see, I guess if you're talking to them, but if you looked at like their clientele, they're gonna have very similar, uh, recommendations. And they're, uh, a lot of times not charging you maybe, or maybe they're charging you less for their services. So just keep in mind that that is going to amp up the conflicts of interest. Now, if it's just a pure agent, they're still gonna have conflicts too, too, they're going to have, um, but it's just going to be less because they're not, they're actually, it's one thing to like go to a, like if you went to the car dealership, um, you know, that's, uh, th the, the salespeople, when they come up to you, you know, it's a sales person, you can kind of like be ready for it and kind of have a fair, uh, you know, conversation knowing that you're dealing with a salesperson they're not, it's not bad or good.
Speaker 1 00:14:15 It's just kinda how it works. Uh, but when you're dealing with an advisor, that's kind of like you think of as an advisor, that's just not really as fair. And it's, in some ways it can be dangerous for your benefit, because when you're not aware that they're actually also acting as an advisor, it's kind of like, they're a, you know, a car salesman, that's, you know, you think they're just a consultant helping you out, but in reality, they're getting paid to sell a car too. So knowing that can change the game, help you out at least know where the incentives are. So what are the incentives? Um, I think in either case whether an they're an advisor agent, or just a pure agent, there's going to be an incentive. Generally, a lot of times they gravitate to just kind of a one size fits all, or maybe just, they gravitate towards a company in general and a product type they get comfortable in, in, in general, and kind of just go with that.
Speaker 1 00:15:04 It's difficult to be truly independent and have a bunch of different companies. Uh, so you'll oftentimes see like a go-to company and that's, that's just kind of, uh, that's not always the case, but that's, that's a lot of times what you see, you also see there's a disincentive to, uh, tell you to shop, uh, for lots and lots of companies. It adds a little bit more work and it also can reduce the costs. So, you know, the more shopping companies you look at, oftentimes there's going to be a lower cost option that you can find, which will ultimately lower their compensation. Uh, there's also a disincentive to tell you that you need less coverage. There's always incentive to say you need more coverage because that's going to increase the amount of compensation, uh, in general, more, the more costs, the more premiums you pay, the higher they get paid.
Speaker 1 00:15:49 It's typically a flat percentage on the costs. So that translates to, you know, especially in this, going back to the advisor agent scenario, like if they're recommending coverage, they're typically gonna have an incentive to lean towards much higher death benefits, uh, like amount of coverage that they recommend. They'll also be more likely to suggest converting to permanent life insurance, permanent life insurance is much more expensive than term. And so that will, uh, increase their compensation considerably a lot of times by like 10 X. So I'll give you a quick example. Like, you know, let's say you're dealing with an insurance agent, whether they're an advisor or not, they say you need a million dollars of coverage. Maybe the term costs $500 insurance agent maybe gets $500 commission at max, or they tell you, you need a million dollars of permanent. It might, might cost $10,000 a year instead of 500.
Speaker 1 00:16:46 And so they're going to get paid maybe $10,000 commission instead of $500 commission. So it's a massive difference in compensation and can big time effect, uh, you know, their, uh, incentives and ultimate recommendations. So ideally you go into working with an agent having kind of a general idea, kind of like when you go to buy a car, ideally you have kind of a general idea of what you're looking for and kind of generally how you're going to pay for it and that sort of thing. But ideally you go into working with an insurance agent, having a, you know, a general idea of the type of coverage you want, the amount you you might need. Um, now they can help you kind of navigate the details, look at the different options, um, explain them, make sure you understand it all help you through the process of literally purchasing, purchasing it and going through medical.
Speaker 1 00:17:35 There's a, there's a kind of a process that you go through. The slippery slope is when you don't go in knowing that, and there, then they become involved in like the advice component of it. And that's where a lot of, uh, incentives can cause problems. So that's just a snippet about how the industry works and some of the things to look out for. So let's talk about, um, how you start to determine, you know, the type of coverage that you get and maybe the amounts that you think about. So I think the most important thing, or everyone is that you have the correct amount of death benefits. So in the event in an unexpected, ideally you have the right amount that pays out. It doesn't matter what kind it is. If something were to happen to you, like your family is going to be most concerned about what that payment amount is.
Speaker 1 00:18:24 And it, you know, whether it's level, term 10, 20, 15, or permanent or whatever, it's all going to the death benefit in that scenario. If something happens it's going to be is it is what it is. So most important thing to focus on is making sure that that death benefit is correct given your, uh, goals and situation. So there's, there's a few different ways to calculate it, but the primary ways I'll share, uh, number one, they call the industry calls, human life value method. That's kind of like what, um, what they use in like a wrongful death lawsuit to figure out the lost earnings, uh, the, the present, the, the, or the dollar amount for the lost earnings. So human life value, essentially what it is is you look at the, if something were to happen to you today, uh, how much lost earnings would you have from now until you ultimately stop working?
Speaker 1 00:19:18 And what is the today value of that? Because let's say you're going to make, you know, $10 million from now until you retire. If you're going to actually make $10 million today, it's not exactly worth $10 million because there's inflation and all that stuff. So, um, you can calculate, uh, the, we, we call it the present value, but that like the today equivalent of what you would need to completely replace your income, or in other words, you can calculate the amount of a pool of wealth that you would need to, uh, kick out your equivalent to your salary on a, on an annual basis for the rest of your life. That's a pretty straightforward calculation, essentially. You're just ensuring your future earnings. And that covers, that's kind of like the lot of times an insurance company really won't insure too much above this level, just because there starts to that's when the that's, when you hear about like the Dateline, uh, you know, scuba diving trip with new married couple and, Oh, he, Oh, it's always like, she got a million dollar life insurance policy right before they left the insurance company.
Speaker 1 00:20:25 I mean, like, they ideally want to avoid that situation. They don't want, uh, there, they don't want incentive for someone to knock you off early, as crazy as that sounds. I mean, they legit think about that. And so that's what that, that human life value is kind of meant to be like the economic value of someone's life. And so that's typically kind of their number that they hone in on as far as like what they would be comfortable issuing you just because that's, when you get too far above that, that dire star, there, there starts to be that's when you're like worth more dead than alive, essentially. Um, so, so that's one method, human life value. Um, the second method I'll share financial needs analysis. So that's kind of just like looking at your, your specific lifestyle and assets, liabilities, how much wealth you already have your goals and looking at in this, uh, method we're trying to back into the dollar amount you need in life insurance coverage, to make sure that you can maintain, uh, the plan essentially that you can like live at the same lifestyle and hit all the goals you want to hit, even if whomever, if either spouse passes away unexpectedly.
Speaker 1 00:21:39 So even if their income gets pulled out of the equation in this analysis, we're backing into what the shortfall is to still meet all the goals and maintain the desired lifestyle for the family and make sure, you know, uh, everything essentially, uh, stays, uh, as planned for. So this is more of like a needs focused analysis. You're uh, so for example, you might be, um, completely financially independent, or, you know, independently wealthy. You have millions of millions of dollars. Uh, and so, but say you're only 30 years old and you're gonna work for another 30 years and the human life value method, you're going to need coverage because you are going to, if, you know, if you strictly want to ensure your income earning potential, you, it doesn't matter that you're financially independent. It doesn't matter that you can meet all your goals, no matter what, you still will need a dollar amount versus in the financial needs analysis.
Speaker 1 00:22:34 It's like, well, you're financially independent. You're going to be able to meet your goals either way. So you need none. So it's more of a needs focused. That's the extreme example. But you know, in this, in this method of analysis analysis, it's more of, uh, you know, making sure your, um, not worth less dead than alive, but also not worth more than dead than alive, kind of striking a balance where ideally your family. So if you're the breadwinner or you're one of the working spouses, ideally your family is the same financially. Um, even if something were to happen to you. So a couple of examples of like what this translates to in, in real-world situations. So the kind of the straightforward and practical in practice example, let's say, uh, let's say you're both, you're married and you both work. You're kind of settled. You're in practice yourself.
Speaker 1 00:23:27 And your lifestyle is kind of flattened out. You know what that's gonna look like. Uh, and if something were to happen unexpectedly, either of your spouses were to pass away, you want to make sure, uh, th the things stay the same financially. You want to kind of make sure it's not worse off, make sure you're not worse off, but you don't necessarily need to be better off or whatever. So this is classic, like financial needs analysis is going to do the job, uh, you know, in most cases. And so you can kind of just see based on that. So this is going to be very much based on your situation. Like, what do you have going on? How much wealth do you already have? What's the lifestyle, how much is each spouse's income? And you can start to use those numbers to, uh, analyze what that shortfall is and come up with.
Speaker 1 00:24:12 Ultimately, the present value or the amount of life insurance necessary to, uh, cover any shortfall. But so that's fairly straightforward. Um, you can, if you work with a financial advisor, they can totally run this scenario for you. Like I mentioned earlier, if they also sell the product that makes it a little dicey, because, you know, there's a lot of variables in here. So they're going to skew, you know, their incentive is to skew towards amping up coverage, but they're definitely going to be in a position to be able to run those numbers for you. There's calculators online that can help you kind of walk through these, uh, calculations, um, something to keep in mind though, think about time, spent taking care of the household. So especially the, the unpaid stuff. So this, everything I've talked about so far is like dollars and cents, but there's for most households, there's this, there's lots of things you do that you don't get paid for.
Speaker 1 00:25:16 So think about like dual earnings, a couple, you know, there's household duties. Um, for most people, those people have an outsourced everything. And so typically there's, the spouses are like splitting it up. And so if, uh, if one spouse were to pass away, like, is that going to be a burden on you to where you're going to have not be able to handle that, uh, cost of taking care of the house? Like you say, it's cleaning the house, just one example, um, you know, taking care of the yard, whatever, if you're, when you get their responsibility plus yours, if that's going to cause a crunch, then you might ought to consider adding those costs of care into the calculation as like an added cost that comes into play in even an unexpected death. This is especially, uh, impactful if you consider like the stay-at-home spouse example, because if you look at like S compensation, um, you know, their compensation might be zero, but like their care time spent like taking care of the kids.
Speaker 1 00:26:17 And, you know, if you have children or just keeping the house up, that's like pretty, pretty substantial. And so, uh, if you're working full time and you have a stay at home spouse, lot of times, you just can't do both of those. Most of the time, you can't do both of those jobs. And so you want to consider the cost of care in that situation, for sure. So, um, maybe the stay-at-home spouse financially, like salary wise, there's not going to be a hit, but maybe you incorporate like five years, 10 years of care costs, um, you know, providing for that in the event of their unexpected death, or maybe you're in the same boat, but you want to play it safe. You're just, you, you just want to play it cautious and make sure. And you, or you, maybe you want to make sure you realize that earnings, uh, that's that you worked really hard for.
Speaker 1 00:27:07 You want to, you want to ensure your earning potential to the fullest. Um, and if you die, you want to make sure your family realizes that that complete earning potential. That totally makes sense. Um, that's more of like the human life value sort of, uh, calculation. It's, it's actually more, it's a simpler calculation. It's just a matter of calculating, you know, looking at your future earnings and then taking the present value of that. Your advisor, uh, insurance agents should be able to help with that sort of calculation as well, or maybe you're in training and, and you both work. Um, maybe you have several kids in training. The financial needs analysis method is, is really pretty difficult to project because, or difficult to use because it involves a lifestyle and lifestyle typically changes quite a bit. When you go into practice, it doesn't necessarily have to, but it's just not always, uh, an easy way to run these numbers.
Speaker 1 00:28:03 Because if you use current numbers, it's going to show, you know, typically the lower lifestyle. So, but then you don't know what your lifestyle is going to increase to. On the other hand, if you use the human life value, that can also be typically, uh, difficult to project, you don't know exactly what your income is going to be. You haven't even started in practice. And, um, maybe you can have maybe have a decent idea of it, but it's difficult to know exactly. So in that situation, in training, a lot of times we kind of use like a hybrid. We look at both, uh, or kind of split the numbers. You don't have to get this. Ideally you have like a pretty good idea of what this number needs to look like for your situation. Um, most of the time, people like to err on the cautious side, and then once you have that number, you kind of make sure you have that amount of coverage in place.
Speaker 1 00:28:53 Uh, and then you reassess it every so often. We typically look at it for clients every one to two years. So that's, that's the other part. So for now, those are the two methods to calculate coverage for like current death benefit needs is like the human life value, you know, all your, for all your future earnings, potential calculated as of today or the financial needs analysis, which is more of a goals based how do we make sure everything stays the same with the plan, but either way that's looking at coverage today, but the next question is, what about the future? Um, how, how long will I need it? Will that amount change, right? We, like I said, we look at this for our planning clients every couple of years, and the number is always changing. I mean, it's just, it's gonna just be a, it doesn't always change like dramatically.
Speaker 1 00:29:40 Usually it's a small changes, uh, up or down, but, uh, sometimes it can be a dramatic change. So ideally, uh, on the front end, when you purchase the coverage, ideally you kind of have a general idea of how long you're gonna need the coverage and in how much of it you will need over time. Now this is even, this becomes even more challenging to pinpoint, but like, like I said, a general idea is, is somewhat helpful. Um, you know, how are you going to need the coverage for five years, 10 years, 50 years forever having a general general idea of this will help you to, to start to structure what it looks like and help to decide what type of coverage you ultimately ultimately get. So, um, so term coverage, uh, so the, the main two types of coverage I'm going to hit on this and I'll circle back on looking at future coverage, but the two main types of coverage term life insurance, it's like temporary death benefit it's coverage, you purchase for a set term period.
Speaker 1 00:30:43 Uh, it's basically the insurance company. When you go to buy term coverage and you apply for it, the insurance is going to say, okay, let me look at your health. Like, they're going to want to look at doctor records, do a blood test, basically anything they can possibly do without like spending too much time and money. Uh, so doctor records are relatively straightforward to get, uh, blood tests, medical questions are common. And so they're going to look at your health and try to place you in one of their cookie cutter kind of predesigned health classes. That's what the underwriter's job is, is they analyze your health and they're going to place you into one of these categories of health class. And essentially that's going to directly affect your, they call it mortality costs, but that's going to directly affect your cost of coverage. So they take, so that's their first step.
Speaker 1 00:31:40 When you apply for term, they look at your health, they under, they kind of place you in one of these health classes. A lot of times insurance companies have a bunch of health classes like 10 or something, you know, multiple health classes. So say they put you in the best health class, that's ideal, cause you're gonna have the lowest costs. And so they first do that and then they add on or tack on their, you know, operating costs. Um, and so, and then commissions for the agent for selling it and all the other expenses. So you got the pure cost of just providing the coverage and then you got all the other costs of just running the business and paying the commissions to the agent and everything else. So if you looked at that, like on a chart, like if you looked at the actual insurance company's costs on a chart, it would be pretty high in the first year, just because they have to pay the agent and then it would go down, but then it gradually would go up over time, mainly because you're getting older and your insurance costs are costs, the risk of something happening is going up.
Speaker 1 00:32:43 And so they've already modeled all these numbers. Um, and they know that it's people don't usually like to pay a different price every year on average. So what they've done is they've designed different types of term that kind of like levelize this cost over a period of time. So it's typically different. The true cost is different every year. Uh, but what the insurance company decided a long time ago, they're like, Hey, let's just take this slot of time of like 10 years. We know what the cost is going to be. Let's just like figure out the tenure level amount that we can make it be the exact same for us. And people will like it more and we'll call it level term 10. So that's, that's where level term came from. Uh, you can get like level term 10, 15, 20, 25, 30 year. Um, there's some companies, I think that'll do variations even outside of those.
Speaker 1 00:33:32 Uh, but essentially what you're doing is paying for that, uh, varying costs, but in a, they just average it all out. So it's the exact same cost you're going to pay every year and it's locked in and you only have to do the health screening one time on the front end. Uh, you pay the cost, they provide the coverage. And then at the end of the whatever term period you have, um, sometimes they just totally take away the coverage and you're done other times, they'll say, you know, you can continue it, but the coverage is way, way, way, way higher. So that's kind of how term works that it's basically coverage predesigned based on your initial health class and based on how you want to structure the term like level term 20 is the most common one. There's also annually renewable term, or it's basically term that increases in cost every year.
Speaker 1 00:34:20 Uh, most common one for sure is level term. And it's a pure, uh, cost of insurance. It's like your it's a very pure insurance in that you're paying just for the re for the risks of death, plus the overhead cost of having to sell in and operate the insurance company. So that's term permanent is the other type kind of category of coverage. You might see, uh, coverage. So with permanent coverage, it's supposed to be, it's designed to be permanent. Uh, there's a lot of variations of it. It gets pretty complicated. I'm gonna hit the high points. So it's all the costs. It's basically the cost of term. Plus there's an investment component. I think that's the simplest way to look at it. There's, it's kind of like combining term coverage with invest in with an investment component. Uh, the investment component is a lot of times it's basically designed to kind of build up this pool of asset of investments, uh, to a point where, you know, maybe you get to a point of being, you know, self-insured or like the death benefit is not that much higher than the amount of wealth that you've built up in it.
Speaker 1 00:35:30 So that there's less of a term component, but if you're just looking at it as simple as possible, permanent coverage is a combination of term and investment smushed together, but designed so that the investment builds large enough to where it can last forever. There's also some tax benefits built into just the product itself. Uh, and you can take out some, you can take out loans, you can take out the amount you put in any time without penalty, uh, on most of them. Uh, and then the death benefit is tax-free I guess the death benefits tax free in both term and permanent, but the debt life insurance, death benefits are tax-free. So, I mean, I don't know how you're feeling, but like at this point probably sounds like, you know, permanent doesn't sound that bad. There's a lot of perks to that. It's like, if it can be, it's like, I'll take, I'd rather buy a house and rent a house.
Speaker 1 00:36:24 It's it makes sense that you would kinda mesh term costs and building the investment component and eventually get to a point where it's self-insured that makes sense. Plus there's tax benefits that sounds appealing and you know, there's quite a few other perks to it. So on the surface, it definitely sounds, uh, solid, but there's a whole lot more to the story and all, I'll probably split this out into another episode, but there is a, there's definitely a lot more to this story that you need to know. It's not, it's not as straightforward as it might seem, and that's, I'm kind of laying it out to like how, if I was an insurance agent kind of explaining the high level differences. So next time we'll hit on kind of the pros and cons that's, that's a permanent life insurance, because I think the one thing I would really stress about the two of these is there is a term is much less complicated.
Speaker 1 00:37:16 Permanent is extremely complicated. It's one of the most complicated financial vehicles out there. And so you want to really understand that and I'll, um, I'll hit on kind of the high points, like I said, next episode. So when in doubt, it's always best to start with term, if there's really any doubt, if you, if you have any doubt, always start with term, make sure you get the right amount of death benefit and that's, uh, that's a fantastic starting point. So how do you decide on, um, you know, going back to the future, like how long are you going to need it? That's the second most important question. So first question is getting the right amount of death benefit and making sure you cover that now, second question is how do you make sure you maintain the right amount of coverage in the future? So on the front end, you can S you can kinda, uh, sometimes you have a decent, if you've done good planning, you have a decent idea of like what you're shooting for.
Speaker 1 00:38:12 So that's a, that's a very helpful component in deciding this. So for example, let's say you are, um, really, uh, you know, on your you're solidly on track for financial independence, say you're 30 years old and you're, you're very solid on track for financial independence in, um, you know, say 20 years. So by 50, you know, you'll financially independent based on your current savings level and your lifestyle and everything else. And so at the, at the longest really you'll be fine with like a level term 20, because by then you'll be financially independent and you're okay with just having, you know, you don't want necessarily want coverage once you're financially independent, you're not worried about ensuring your earning potential, even if you choose to work beyond then. So in that situation, you're shooting for financial independence 20 years from now, you know, level, term 20, if you're starting out.
Speaker 1 00:39:03 I mean, that makes a lot of sense. And maybe even if, you know, so a lot of times it's not like perfectly level for 20 years. Maybe you don't need the exact say, it's say you need a, you know, $3 million of coverage. Maybe you don't need exactly $3 million for 20 years. Maybe you do, but more often it stairsteps down as you approach financial independence. So another scenario is, let's say, you know, you need some coverage for 20 years, but let's say by 10 years, you're gonna have like, uh, all the debt is going to be paid off. Uh, the kids' education will be fully funded. So maybe then it like stairsteps down in coverage. So the way you can do that is you get like half of it. So maybe you get one and a half million of level, 10 coverage, and one and a half million, a level 20, they call it layering term, but you can kind of split it up between the two of those so that you get one and a half million or sorry, 3 million total for, for 10 years.
Speaker 1 00:39:57 And then it drops off. It's kind of already built in to drop off after 10 years and go down to one and a half for the next 10 years. The reason why that's beneficial is because level term 10 is much less expensive than level 20, which is much less expensive than level 30 longer the lock-in period, the more expensive it is. And so ideally you kind of, you can kind of structure that to be, if you know, you're going to reduce it in 10 years, it's, you might as well not pay for locking it in if you're not going to not going to use it or on the other hand, maybe you're not sure, maybe you're a 30 years old and you still, you kind of liked the idea of shooting for financial independence by age 50 or so, so 20 years from now, but you're just not sure if you're saving enough, uh, or you're kind of aspiring to save enough.
Speaker 1 00:40:43 You're kind of working towards that point of being able to save enough. Um, I would definitely play it much safer in that situation. I would kind of lean towards maybe a 30 year term or at least being cautious with this because, you know, you're not doing what it takes yet or are, you don't know that you're doing what it takes. So I would be, I would want to be more confident about being on track for something like this before I start kind of shaping something like five insurance around that you can always change it in the future. So I kind of, I would kind of lean towards playing it, cautious with this sort of thing and do the planning and kind of do what it takes to get on track for something like financial independence. And then you can start to, uh, make adjustments, but financial independence, uh, or the wealth that you have is a huge driver for all this.
Speaker 1 00:41:30 And when you expect to reach that point, and so ideally you kind of shape the amount of coverage you have around how close you are or how far you are from that. And as you approach that, it, it gets kind of adjusted automatically. Ideally you structure it to where it's kind of automatically having built-in adjustments, like in the form of you have level term 20 and level turn 10. So it jumps, it kind of prebuilt has a reduction at 10 years, but, um, you know, that's, that's not, uh, easy projection to make. And so, uh, for, for most people on top of all this, you want to just have like a check-in every one or two years where you reassess the numbers. So that's what we do with our clients is we look at their, uh, coverage versus need every one, two years. And so then you can just make tweaks to what you own.
Speaker 1 00:42:22 A lot of people, you know, most people don't realize you can, for a typical insurance policies, you don't have to keep it exactly in its original structure of the entire time. A lot of insurance companies will let you reduce it. Um, they typically won't let you increase it without verifying health again, but they'll a lot of them will allow you to reduce it. So say you started with 3 million, two years later, you're confident you really are, will be comfortable with two and a half million. In a lot of cases, you can reach out to the insurer and ask them to reduce it to two and a half million and you can, and that's going to be a better fit. And you'll also be able to save the premium costs. So at minimum, though, it's good to reassess that every couple of years, cause sometimes it'll go up say your income goes up and your lifestyle goes, says, goes up.
Speaker 1 00:43:07 So in the event of your death, there's, there's going to be a bigger shortfall. So as far as like, so once you know, how, what type of coverage you're going to select and have an idea of how long you're going to try to maintain that coverage for, um, then you're, you can start to think about companies and life. The good thing about life insurance, as far as, uh, claims purposes, it's much more straight forward. I mean, you're, you know, you're either dead or alive at th there are some gray area claims. Um, I remember hearing about some in the insurance world, but they're much less common than like in disability insurance world where it's like, you know, that's pretty, that's pretty, uh, gray, there's gray area claims for disability. Um, maybe he's not able to work. Maybe she's able to work it's whereas life insurance much more straightforward.
Speaker 1 00:43:55 So it's generally something that gets has, has become commoditized because, because it's so straight forward, it's difficult for companies to kind of separate themselves. And it, a lot, it ends up being mostly about costs and in general lower costs I would say are probably better, but that's not always the case. I think this is where an agent can help you understand kind of the pros and cons of different companies. Uh, obviously you want a company that's going to be good to deal with in case something were to happen. I'm sure there's some things, you know, we haven't thought about that might come up and an agent should be able to share those things as far like pros and cons between different companies. And then if you're starting to, if you have a potential need for permanent life insurance and you're starting with term, it is good to make sure the company has a, uh, solid, uh, option for that.
Speaker 1 00:44:48 Because with permanent, it becomes much more about company. Like what term it's more about costs, uh, with permanent coverage. The company becomes a lot higher, a lot more important consideration. And it's, it's definitely a good idea to kind of look at that as well. Um, but we'll talk about that more next time. I think it's, it's, it's not as commonly needed to have a vehicle, permanent life insurance as a lot of people think. And a lot of agents say, uh, but it's sometimes definitely of neat. So like I said, a good agent should be able to help you kind of navigate this. Uh, also if there's health conditions, uh, different companies have different ways in how they handle various health conditions, sometimes it's substantial differences. So for example, um, you know, I remember for, uh, something straightforward, like, uh, smoking versus non-smoking versus chewing or dipping are like the, uh, all the different companies have different number of years.
Speaker 1 00:45:49 I think it was on air on average, like between one and three years, they wanted you to be like non-smoker for somewhere between one and three years before they would consider you a non-smoker. And when I say non-smoker, I mean, you say you are a non-smoker and have been for X number of years, and they're also going to do typically like a nicotine, uh, test to see, to verify that. But, but, um, one to three years, that's a big variance. So let's say you have been non-smoker for one year or, you know, over one year company, X is going to be still calling you tobacco company. Y is going to be like, no, that's okay. We'll call you non tobacco. Cause it's been a year. And the difference in cost between a tobacco user and non tobacco is substantial. It's, you know, maybe double, I mean, it's a lot more, if you are a tobacco user for life insurance.
Speaker 1 00:46:39 So ideally you find that company, that's going to look at that more favorably in that situation, or, you know, other health conditions. I would ask the agent, uh, if you have health conditions, ask them how this is, how different companies view this and how it might affect things. Also a little note about underwriting, uh, or the process of them kind of checking you out. Uh, if you haven't gone through this already before, it's, it's kind of a pain in, but it's just, it's really like an old school industry, old school systems. Like they, the insurance industry has been pretty slow to adapt. They still do a lot of things. Like how you would think of is like, you know how we did things 50 years ago. So the process is a little bit can be tedious. Sometimes it's a breeze, especially if you have zero health conditions, if have nothing on your health record or you honestly, if you've never seen a doctor, not that that's a good thing, but if you've never seen a doctor and you have nothing on your health record and nothing shows up in your blood work, it's going to be a breeze.
Speaker 1 00:47:42 But what happens is you, most people have seen doctors, sometimes doctor records, they're gonna want to ask for Dr. <inaudible> time. Sometimes those are very difficult to obtain. It can take forever. Sometimes it's impossible to get them. And then a lot of times they find seven. The doctor records that they're curious about and they want to ask questions and they want to dig in and they want to ask for followup tests. So it can be dragged. It can get dragged out. The doctor records are probably the number one thing that drags it out. So just kind of, it's just good to be prepared. I think on the front end for that don't expect a fast, efficient process, but that doesn't mean you shouldn't do it. It's still extremely important to get that ball rolling is, you know, even more so because it takes awhile and you know, you never know what can happen.
Speaker 1 00:48:28 And so another little side note, some companies will offer, uh, they call it conditional coverage, but some companies will offer you the option to like secure coverage immediately when you pay the first premium, even before they've done their underwriting. Like the small print is that you have to have been approved based on that point in time. So like if they were going to deny you all along that wouldn't, it would be not applicable. They would not cover you if something were to happen. But if they were going to insure you let's say you were trying to get insurance and you were in perfect health, they were going to insure you all based on your health. At that point in time, when you apply, you pay the first bream, you get conditional coverage, say you had a car accident and pass away like a week later, if you had gotten the conditional coverage and they would have insured you at that point in time, they'll cover you for the car accident, even though they haven't finished underwriting.
Speaker 1 00:49:20 Uh, so that's, if you purchase, they call conditional coverage. On the other hand, you can get it where you are covered on the back end. Like, you know, you don't pay any in that second scenario that you don't pay anything on the front end, they don't charge you until it's approved and applied for and you sign off on it. Uh, the downside of that route is there's no coverage, no matter what, until it's all zipped up and finalize. So I think the key though, just to kind of in summarizing this, the key is to think about, uh, you know, have that exercise where you think about it and go through how much should I have in coverage. If you're not excited about calculating this or running through the numbers, to figure it out, go find a advisor to help you walk through the process of calculating how much you need, ideally they don't sell it.
Speaker 1 00:50:13 So help calculate that number of how much you need, make sure you have that much. If you don't, you need to look at maybe getting more. And if you're gonna purchase more, think about like how long you might need the coverage and try to get the, uh, try to structure that based on how long you expect to need that coverage. And with permanent life insurance, it's extremely complicated. And I would proceed with caution. I'll cover that in the next episode, but, um, for now proceed with caution when in doubt here on the side of just getting term and getting the right amount of death benefit, and then that way you don't have to worry about this, this kind of thing. And so that's kind of the, the main points for today. Um, hope this has been helpful. Uh, like I said in the beginning, let me know if you have questions, you know, maybe on this specific topic, maybe on other unrelated stuff, definitely hit us up for questions.
Speaker 1 00:51:08 Good chatting with you as always. And we'll look forward to talking next time. Okay. As always, thank you so much for joining us today. If you found this valuable, please give us a review on iTunes and share with a friend. Also check out our website at finance, for physicians.co for all sorts of additional content. See you next time. Finance for physicians is not an investment tax legal or financial advisor. All content included in this podcast is for informational purposes only and should not be considered financial tax or legal advice. Material presented. It is believed to be from reliable sources and no representations are made by finance for physicians as to another party's informational accuracy or completeness, all information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. You don't have an advisor or like a second opinion. Feel free to check out our website for recommended advisors.
