Power Up Wealth podcast – Protecting Against the Unthinkable – Episode 16 transcript:
James Derrick 0:00
Who needs life insurance? How do you decide which kind to buy? And how much do you pay for? I’m James Derrick and today we will be talking about life insurance with our guest and expert Jordan Hadfield.
Sharla Jessop 0:22
Welcome to the SFS Power Up Wealth podcast where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
James Derrick 0:45
Thank you for joining me today, Jordan.
Jordan Hadfield 0:47
Glad to be here. Thanks for having me.
James Derrick 0:49
Jordan is a Wealth Management Advisor at Smedley Financial Services. He holds a Certified Financial Planner designation. Jordan, this is a fascinating topic to me. I even have a personal question we will get to later. But let’s start out with a basic why do you feel it’s important to talk to people about life insurance?
Jordan Hadfield 1:04
Unfortunately, I have seen individuals pass without life insurance, and it leaves family members and loved ones with a financial burden. And especially during a time of passing when you’re grieving the loss of a loved one to throw a financial burden on top of that is overwhelming. And that’s it’s a really sad thing to see. It’s very important to me that that risk is mitigated as much as possible. So that if there is a loss of life, unexpectedly, family members can move forward as easily as possible given the difficulty of the situation. And I think life insurance does a lot to help that. You know, according to LIMRA, which is the Life Insurance Marketing and Research Association, 48% of consumers, in other words, American adults, do not report having any life insurance at all. That’s approximately 108.4 million people in the United States that do not have any life insurance whatsoever. That’s particularly interesting when you contrast it with the next statistic, which is just under 50% of American households say they would face financial hardship within six months if an earner in that household is to pass unexpectedly. Within six months! 30% say they would struggle within four weeks. So this points to a number of different things. An emergency fund. The importance of an emergency fund. The importance of saving. You know, living within our means. But it also points to a need for life insurance. You ask why I think life insurance is important. Recently, I’ve had an event in my life that has kind of underscored the importance of life insurance. A number of years ago, I decided that I needed to purchase life insurance on my own life to protect my family if something were to happen to me. That was important. It was a concern. And it was a goal that I’ve that I’ve accomplished it the same time, I started looking at life insurance on my wife. Again, life insurance on her life, which would protect me from a financial perspective, if something were to happen to her. And when I was shopping for life insurance on her life, I paid more attention to premiums than anything else. My main goal was to protect her and my children from my passing. When I started thinking about protecting myself from her passing, I focused more on cost, on premiums. And that resulted in me buying a smaller policy. About two years later, my wife was diagnosed with cancer. And in that moment, I wasn’t thinking about life insurance at all. But in hindsight, I’ve wondered if her diagnosis was terminal, what would happen to me and my children. And I realized that she’s underinsured and I had made a mistake when purchasing a policy for her. I failed to plan for the unthinkable, right, for the unexpected. And I put my family at risk. That’s kind of a scary thought. Now she’s no longer able to purchase life insurance, she doesn’t qualify because of her diagnosis. That’s a concern for me, for my clients. That’s something that I think about often when this conversation comes up, These two events in my life and, and how even I as a life insurance agent should have known better. But in that moment, I was thinking it won’t happen to me. It won’t happen to her. We’ll be fine. I bought just enough life insurance that I felt comfortable, but I didn’t buy enough life insurance that I was protected. And so I want to raise that alarm for people and make sure that they understand, you know, some of the things they need to consider. My wife does work. She has an income, so I would lose her income. But on top of that, I would have increased childcare expenses. My wife works from home and she also does most of the takes care of most of the childcare. She’s an amazing woman. I don’t I don’t know how women can balance all the things they do. She’s incredibly strong. I’m lucky to have her but if something were to happen to her I would need to replace her income and then I would have childcare expenses on top of that, which can get very expensive. And maybe it’s just because of my wife’s diagnosis that I’m paying more attention. But I’m definitely noticing that people around me are being diagnosed with illnesses such as cancer. Again, there’s no facts to support that this is, or excuse me, I have no facts to support that this is actually growing. I’m paying attention more, and I’m seeing it more. And I realize there’s a real need for people to have life insurance. And so yeah, it is important to me to talk about.
James Derrick 5:35
Well, I really appreciate you sharing your personal experience. Why doesn’t everybody have life insurance? I mean, who needs it? And why don’t they have it?
Jordan Hadfield 5:43
Yeah, so more than half of Americans say they haven’t purchased a life insurance policy, because they don’t know how much they need, and they don’t know what to buy. So let’s break that question down a little bit. Who needs life insurance? There’s a number of goals that life insurance can accomplish. Okay, for business owner, for example, may want to purchase a life insurance policy on a partner. You know, that way there’s liquidity in the business, if a partner passes. They can buy, you know, buy the business from the family and keep the business running. So to create liquidity, and in a case like that would be important. Other goals are final final burial expenses, people buy smaller policies for that reason. A third reason would be inheritance, there are individuals that have desires to leave a large inheritance to a family member, or to a charity, and so they’ll purchase life insurance for that reason. All of those reasons are important. But for the sake of our conversation today, I want to focus on an individual family’s needs. So there may be other reasons to purchase life insurance. For for today’s purposes, we’re going to focus on the individual family, and those who need life insurance are those who have dependents. If there is someone who’s dependent on you, for your income, or for child care, you need life insurance to some degree. As we get older, and we save more money, as we are are building our emergency funds and our savings accounts and our retirement accounts. As our children grow older, our need for life insurance actually decreases. Personally, I can tell you what I did on my, on my policies. I actually bought two policies. Two term policies. One is large, larger than the other. And it goes it expires about the time my youngest turns 18, a little bit after, okay. The second policy runs a lot longer than that. It runs until I’m 65. And it’s a smaller amount. That way, I’m heavy, heavy protected, when my kids are at home, and my wife has got that need. As my kids move away, my savings should grow. My need is less. And so my first policy drops off. My second continues until age 65. When it terminates, if something were to happen to me at that point, I should have my retirement funded. That’s the goal. It’s the idea. And so my wife wouldn’t have a need at that point for life insurance money. And so it terminates at that point. If we’ve got children that are dependent on us. If we have elderly parents that are dependent on us. There’s a need for life insurance.
James Derrick 8:21
And Jordan, how do you decide how much insurance that you need?
Jordan Hadfield 8:25
So there’s a number of factors that come into play here. Generally speaking, the rule of thumb is 10 times your annual income. Now I state that’s a general rule. I’m also going to state I don’t like general rules. And that’s because everyone’s situation is different. And oftentimes, I find that 10 times income is not enough. For other people it is and for some people, it might even be too much. So it’s important to talk about these things specifically. But that is something that you’ll see online a lot. 10 times income is kind of a base. Other things to consider, though, is not just income, but also retirement savings. If something happens to me, we’ll use me for an example. My wife will inherit my savings accounts and my retirement accounts. Life insurance will protect her while she’s raising the children and thereafter, but I’m no longer contributing to retirement, my retirement accounts aren’t growing, which means if my life insurance is going to protect my wife, I need to replace more than my income, I also need to replace some retirement savings so that she’s got retirement there. Any debts are important to factor into the equation. So if you’ve got a mortgage, or you’ve got other significant debt, student loan debts, these are important to consider. Child care costs, of course, is already something I’ve mentioned, that can get very expensive. If there’s a single parent who’s working outside of the home, they’re gonna have to hire someone in most situations, to help raise the children and that can get costly. College expenses is another big one that comes up. Clients say if something happens to me I want to make sure my children can get through college so that you know they’re set up for success, despite the fact I’m not here to help them with that. And then for other clients, there’s other expenses that also need to be factored in. Again, everyone’s different. It’s important to plan specifically around your situation and your goals. When determining how much life insurance to buy. My recommendation there speak with a professional.
James Derrick 10:19
Currently, in the United States, inflation is over 8%. And I was just thinking, you know, when you do 10 times your income, as you mentioned, like 20 years from now, I mean, that might not be as much as you think.
Jordan Hadfield 10:30
Absolutely. So for example, if you buy a million dollar policy, and inflation is only three and a half percent, in 10 years, you’ve got $700,000, the equivalent of $700,000. So yeah, inflation will eat into that, that needs to be factored in if we’re talking long term. Absolutely. Good point.
James Derrick 10:47
Very interesting. Okay. And now there are different types of insurance.
Jordan Hadfield 10:47
Yes.
James Derrick 10:49
People can select. And this is where it starts to get very confusing, because I think the dollar amounts people can conceptualize, but this is a harder decision. How do you choose?
Jordan Hadfield 11:02
There’s two main types of insurance. There’s permanent insurance or term insurance, we’ll break these down and talk about kind of the differences between the two. As far as permanent insurance, the most common is whole life. That’s something that most people have heard of, and whole life guarantees a payout. At some point in time, I’m gonna pass. And if I own a whole life policy, at some point in time, it will pay out at my passing. Whole life insurance has a guaranteed premium. As long as I’m paying that premium, the policy will pay, but there’s some complexities to whole life. There’s also a cash balance account that can grow in the account kind of a savings component to the whole life insurance policy. And as it grows, you can use it to buy more insurance, you can use it to pay your premiums. You’ve got these type of options in a whole life policy. So there is guaranteed growth in a whole life policy. Now, there are some really cool strategies we can use inside of a whole life policy, such as tax free growth that we use with kind of high net worth clients. But for the most part, I’m not a big fan of whole life. And let me tell you why. What do we know about insurance companies? They make a lot of money, right? Whenever we buy an insurance product, you can bet that the insurance company is making money off that product. So when I buy life insurance, I don’t want the bells and the whistles. And you don’t need to sell me on the under spray, and the extended warranty and all of those kinds of things that the life insurance company wants to throw on. I want life insurance, I don’t need to pay extra for a savings component. Now, again, there are some situations where whole life is fantastic. There are some situations where whole life makes a lot of sense, but it’s not for everybody. Okay, one thing that I like to talk about with whole life or with permanent insurance is make sure your life insurance salesman isn’t the beneficiary of the policy. In other words, you’re going to list your own beneficiaries, if something happens to you. But your life insurance agent might also be a beneficiary just by selling you the policy. And, and unfortunately, I’ve seen that on occasion where someone who doesn’t need whole life is sold whole life. And it’s possible because it’s because of the commission’s involved. So that’s just a personal bias I have maybe. In most situations, I’m not a big fan of whole life. Universal life and variable life get even more complex. Universal life has got flexible premiums. So in other words, with whole life, you’ve got guaranteed locked in premiums. With universal life, you can change those premiums, if you need to, either up or down. That will affect the payout of the policy. But you’ve got flexible premiums in the Universal life. Variable universal life has an investment component. So now we can take some of our life insurance, some of our premiums and invest it in the market. And as it grows, the payout of the policy will also grow. Once again, do we want our insurance company to handle our investments for us? I think it’s expensive. There are some situations where universal and variable universal life makes sense. But there’s a cost component. You know, for consumers who are looking for life insurance. It’s important that they’re aware of that. And those are the three main types of permanent insurance. Let’s talk about term insurance. Term insurance is most common. For all our Dave Ramsey fans listening, he’s a huge proponent of term insurance. Term insurance is is pretty simple. Not a lot of extras, okay? You’re buying life insurance. When you buy term insurance and nothing more. Term insurance, you determine the length of the policy. In other words, the term. And you determine the face value of the policy. In other words, the payout. Okay. So let’s say I want to buy life insurance. I want it to last 25 years. And I want it to be a million dollars. That’s I would buy a term insurance policy. My premiums are locked so they’re not going to go up within that 25 year period, and the payout, the face value isn’t going to change either, right, it will stay the same. One thing I want to mention about life insurance is when you sign, when you sign a policy, the life insurance company is under contract. If something happens to you, they have to pay out as long as you’ve been honest and obeyed the policy, the rules within the policy. You are not under that same contract. So if I buy a term insurance policy, a 25 year million dollar policy, 15 years down the road, I decide I don’t need it, I can quit paying the premiums. The policy will lapse, and there’s no additional penalty to me. So that’s that’s interesting to note. One other thing I want to mention, one other type of insurance that is worth mentioning is called group life insurance. And this is not something that a consumer can buy on their own. It’s something that we get through an employer. An employer offers it group life in most situations is my favorite type of insurance. It’s the cheapest and there’s no underwriting. Whenever you buy a term insurance policy, or a permanent insurance policy, you have to go through some underwriting. Okay. The insurance company is going to pull your medical records. They’re going to show up to your house most likely, take blood samples, the health assessment, and then it’s going to go to an underwriter and they’re going to determine are you eligible for life insurance, how much that premium is going to be based on on your health condition, your medical history, there’s none of that in group life. So group life is very, very easy. And so if you’ve got the ability to purchase life insurance, through an employer do so. This is something I see clients do often. Individuals do often. And it’s fantastic. But there is a word of caution with group life. And that is when you leave your employer, you leave your life insurance. In other words, if I’m 25 years old, and I go to work for ABC Incorporated, I get life insurance through them, and I don’t buy anything additional. And during my time with them, something happens to me. I’m diagnosed with with an illness or disease or something happens to my health, that makes me uninsurable. Once I leave ABC, I may not be able to get insurance at that point. So even for those clients that have group life, it’s important to have an additional life insurance policy on top of that, so that if you ever leave that company, your life insurance, you know, it goes with you. So that’s important to mention.
James Derrick 17:19
I think that’s a really good warning. It’s fascinating to think about, we used to have a joke around here that when the insurance company comes out for underwriting, don’t eat two Twinkies that day, just in case.
Jordan Hadfield 17:29
Yeah, it’s true.
James Derrick 17:30
I want to dive a little bit deeper into what happens to term insurance once it lapses. And the reason for this is when my first daughter was born, I bought life insurance, and half of that was whole. And half of that was term. And it’s been long enough now that that term is going to expire. So what’s going to happen? What options do I have? Should I keep it going? Should I reapply? Or should I just maybe I don’t need it anymore?
Jordan Hadfield 17:55
Yes, James, that’s a very good question. So every policy is different. So whenever you get a life insurance policy, you want to review the policy itself and the details of that policy. However, most term insurance policies, when they end, when you hit you know that that initial 15, year 25, ear 30 year period, the policy itself actually doesn’t end. It just goes into an annual renewal. Now, what happens during that annual renewal, generally speaking, is your prices go up, and they go way up. So it’s possible that when your term insurance policy comes to an end, you’ll start to see your prices creep up. And sometimes they can, like I said, they can jump pretty significantly. So in many cases, it makes sense to just cancel the policy and apply. But one thing that’s important to know about life insurance. The older you are, the more insurance costs, your prices go up. If you were to get insurance, now a new policy, you will have a different rate than when you bought it when you’re when your daughter was young. So that’s something to keep in mind. Most people end up as long as they’re in good health, looking at a new policy. And I think that’s a wise option to explore. One thing I wanted to mention is you said do I even need it still. There’s a lot of people who don’t need life insurance anymore, and they’re still carrying it. And so it’s important to review older policies. And when you have policies that that are coming close to terminating, to exploring what do I want to do here. Ideally, we carry life insurance when we’re younger when we’re a young family, and we’ve got dependents. And as we as we age, and we save and we make more money and our retirement accounts grow, we have less of a need for life insurance. Right? And so it’s possible that that you may not need that policy anymore, depending on if you can self insure. That’s ultimately the goal is self insurance. Typically, people don’t reach that until retirement age.
James Derrick 19:53
Fascinating. Jordan, how do you select a company. There are a lot of companies out there providing life insurance. As an agent, do you have one that you use? Do you shop around? How do people make this decision?
Jordan Hadfield 20:05
That’s a very good question, actually. Because different people qualify for different rates at different companies. So just because I use one company for client A doesn’t mean, that company is going to be the best for client B, depending on their situation. When we run life insurance quotes, we run all of the major companies all at the same time. So I put in some very basic health information into a program that immediately returns rates for all of the major companies based on that health information. And then I can pick the one that’s the cheapest. When we’re buying life insurance, we want to buy life insurance from a reputable company. If the company’s not around 25-30 years from now, it’s gonna be hard to get a payout. So buying from someone who’s reputable is important. And shopping for the lowest cost is also important.
James Derrick 20:37
When you’re talking about life insurance. It seems like that longevity, that staying power of the company is everything.
Jordan Hadfield 20:59
Yeah, there’s a lot of truth to that. Fortunately, I do not have any stories about life insurance companies going bankrupt and not paying out. But I’m sure they’re out there. I’m sure if I hunted, I could find something that that would be troublesome. So whenever I’m selling life insurance, I’m selling from a major reputable company. And then I’m comparing quotes from all of these different major companies.
James Derrick 21:24
And incredibly important. What other facts do you think people would want to know, Jordan?
Jordan Hadfield 21:29
Yeah, so the first thing I would say is not all life insurance agents are fiduciaries. I am a fiduciary. That means I have a legal responsibility to do what’s in my client’s best interest. And this comes to life insurance. If I’m meeting with someone about life insurance, I have to be able to prove legally that my recommendation to the client is best for the client. A lot of life insurance agencies don’t fall under the standard. They’re not fiduciaries. And that’s important. Another thing that comes up commonly is taxes, and how life insurance is taxed. A life insurance payout is tax free, no tax do. So that’s that’s a good thing. And forgive me, I understand this is kind of a difficult topic, but it is worth mentioning. And that is suicide. I have had clients ask what happens in case of a suicide. There is a suicide clause in most life insurance policies. And it typically is two years. That means if somebody decides to take their own life, within the two year period of buying a life insurance policy, it will not pay out. However, if it’s after two years, it will. Now every state’s a little different. Most commonly, it’s two years. There’s a number of reasons why someone may make that decision. And I don’t want to get into those. But after a two year period, a life insurance policy will cover a suicide. Interestingly, the topic of physician assisted suicides comes up. There are 10 states in the country now that have laws to allow doctor assisted suicides. They’re called Death with Dignity laws, and the same rule applies. So if someone decides to go that route with the help of a doctor, and it’s been more than two years, the policy should still pay out. The last thing I want to mention is I’ve heard life insurance is like a parachute. If you don’t have it when you need it, there is no second chances. And, and that’s really true. It is important to review your life insurance needs before the moment of crisis. Before a diagnosis. You need life insurance when you’re still young and healthy. And you think you don’t need it. That is when you should be buying it. It is better to buy life insurance 15 years too early than 15 seconds too late. So meet with someone that you trust. I recommend you meet with a fiduciary. Review your specific situation. What your specific goals are. Determine what type is best for you and how much you need. These decisions are hard. The topic is sometimes difficult to discuss. No one likes to plan around their death. But it is important I would recommend you don’t put it off and we try and mitigate this risk as much as we can.
James Derrick 24:09
Thank you, Jordan for joining us. This has been insightful. The main message that I’m coming away with is stop procrastinating and get the conversation started. Start moving forward.
Jordan Hadfield 24:19
Yeah. And if you’ve got life insurance policies, and you’re questioning, should I continue to pay those premiums. Come in and meet with us. If you’ve got life insurance needs, meet with us. I personally have never made a penny off a life insurance policy that I sell. If you meet with me. I’ve got no reason no personal reason, no hidden motivations to sell you a life insurance policy. I want to do what’s best for you and your family. I want to protect you. Come in and meet with us. We’d love to answer any other questions you have regarding life insurance in your situation.
James Derrick 24:51
All right. Thank you, Jordan for joining us today.
Jordan Hadfield 24:53
Yeah, glad to be here. Thanks, James.
Shane Thomas 24:54
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn.
The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Lorayne B. Taylor, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
