4 reasons why you need life insurance that no financial firm will tell you
When it comes to retirement planning, investing and insurance there is no shortage of financial (*cough*) “experts” who espouse the supposed sage advice of eschewing permanent life insurance vehicles such as Whole Life Insurance, Universal Life, or Indexed Universal Life in favor of Term Life Insurance.
They recommend taking the premium savings and investing the difference in the stock market. All one needs to do is scan the internet for quotes from the likes of Suze Orman, who is on record as stating that she “HATES WHOLE LIFE INSURANCE”, and that everyone should just buy Term Insurance.
Dave Ramsey, another financial soothsayer, is often heard preaching “Myth: Cash value life insurance, like Whole Life, will help me retire wealthy. Truth: Cash value life insurance is one of the worst financial products available.”
Even Mack Dudayev, CEO of Insurance Chance Inc. (a person therefor in the profession of selling Whole Life Insurance), has stated that “Some agents continue to be attached to the notion that Whole Life Insurance is a good product for the consumer. The truth is, for the huge majority of the population, Whole Life doesn’t make much sense.”
Now, are these financial overlords correct in their convictions that you should avoid permanent life insurance products like Whole Life Insurance, and that you would be better off over the long haul by just buying a cheaper “Term Policy” and investing the difference?
The answer, shockingly enough, will not come from the insurance industry executives or their professional agents and in fact it is not even going to be answered by most financial professionals. The answer, believe or not, really comes from the federal government and lies within what it has been telling us about our health for years.
The other surprising nugget is that when you realize just exactly what you are not being told you will most likely realize that you should run from these people telling you to avoid permanent insurance and buy term coverage. Matter of fact, you should run now, and run like your retirement, Social Security, and tax bracket depended on it.
Here are four simple reasons why you should have permanent life insurance in your portfolio and please note that not one of the financial charlatans and soothsayers will ever tell you this:
Reason 1 – Control your health costs
Believe it or not, no matter what these financial (*cough*) “experts” and other professionals tell you, what the President has been saying since 2011 is actually true:
You must have health coverage, or else you will face penalties, fines and possibly a loss of your Social Security benefit. Joe Biden will even personally travel to your home and punch you in the stomach, just to learn ya. This means that you must have Medicare.
But what’s the big deal? Medicare is just part of getting old – like watching golf on TV, or plucking earlobe hairs. We’ve known this since 1965. Well, Medicare just happens to not be free, and is also based on your income. Meaning the more income you have, the higher your health costs will be.
But what can this cost?
For a 55 year old couple that plans on retiring at age 67 and living to age 85, in order to be fully insured (Medicare Part B, Part D and Plan F Medigap Plan), they can expect to incur roughly $524,493 in costs for just their premiums.
A little tidbit that the anti permanent life insurance crowd neglects to tell you is that health care costs are expected to inflate by 6.2% per year going forward. This data is straight from Fidelity Investments’ own “Planning for Health Care in Retirement” power point, which quotes the Centers of Medicare Services (CMS).
Here is the fun part: as we said earlier, Medicare is “means-tested”. So the government will look at how much income you are earning, which is practically everything in your financial plan. Suppose the hypothetical couple mentioned above happened to earn $1 too much by Medicare standards: they could then expect to pay $639,620 for the exact same coverage over the same period, a difference of$115,127, or the equivalent of two center ice tickets to watch the Boston Bruins on a Wednesday night.
There’s even more joy if this same couple earns the maximum income for Medicare means-testing purposes. They can expect to incur about $1.16 million for the exact same coverage.
Keep in mind that President Obama has called for the following in his fiscal budget: a decrease in these Medicare Income limits until 25% of all retirees are impacted by it.
Simply put, he would like to see 25% of retirees pay more for Medicare and there is legislation to prove it.
Now why life insurance, specifically permanent policies? Well, the “cash value” within permanent life insurance policies (which can also be guaranteed in certain plans), just happens to not count as income by Medicare. So you will be able to tap a revenue source in retirement that won’t be used against you when your health is on the line.
But again, if you listen to the (*cough*) “experts”, you will believe that life insurance should be hated. They are actually advising that you “invest” your dollars into investments that will be used against you when your health is on the line.
Reason 2 – Save your Social Security benefit
Believe or not, Social Security is not going broke and it most likely never will go broke, NO MATTER WHAT THESE FINANCIAL WIZARDS SAY.
In retirement, you will fund your health care directly through your Social Security benefit. Currently by law, Medicare Part B premiums, any late penalties, and all surcharges due to income must be deducted automatically from your Social Security benefit. Medicare Part D premiums are optional, but retirees are encouraged to pay for them through Social Security to avoid any missed payments later on in life.
The fun part: Medicare premiums have historically inflated at over 7.5% annually, while they are expected to inflate by at least 6.2% going forward. This while Social Security cost of living adjustments (COLAs) are only expected to inflate by as much as 2.8% for the foreseeable future, according to the Medicare Board of Trustees.
Why Life Insurance? Again, it generates a source of income that can not only be used to supplement the loss of Social Security, but also will not drive up those pesky health costs in the form of higher surcharges imposed by Medicare.
Thus, you get to keep more of your Social Security benefit in retirement and have a more predictable cash flow. But do you really care about that? It would seem that the financial pundits don’t. There’s so much more money to be made on Wall Street!
Reason 3 – Lower your taxes…BY A LOT
It should be obvious by now, but let’s go through the math… You are being told to invest, most likely into “tax deferred” accounts like your company’s 401(k). This is great, because you will pay less tax today, and your employer may even chip in some extra dough on top of that. However, as many of us learned in Remedial Science 101, every action has an equal and opposite reaction. It would seem that paying no tax now in exchange for having to pay tax later on in life would be a bad reaction.
As pointed out in “401(k). Which should you pick, Traditional or Roth?,” the mathematics are staggering. For a 30 year-old person earning $75,000 per year who decides to invest the maximum amount of money into a Traditional 401(k), the probability of saving roughly $730,000 in taxes is extremely high.
The problem is once this person reaches the age of 70 he or she will, if the account grows at only 5%, pay roughly $1.5 million back in taxes while retired, and their overall nest egg will be cut in half. At best.
The other issue? Being taxed two more times as well. Yes, two!
Due to their income levels in the above example, the Social Security benefit received will also be taxed – up to 85% of the benefit! The odds that this increases the likelihood of this person being in at least the first Medicare Income penalty bracket are as good as the New York Jets not winning the Super Bowl.
By using a Life Insurance policy as an additional means of saving for retirement, this person will create yet another way to pay fewer taxes while being able to keep more for themselves. Yes, they will start retirement with less, but they will most likely end with a lot more.
Are you still surprised when the Vice President of the United States comments on how most Americans want to give the government more money each year, as it is the Patriotic thing to do? Mr. Biden probably understand these rules better than most, since the bulk of them were created while he was still in the Senate.
He most likely understands that every dollar you invest into a Traditional 401(k) will ultimately lead to:
- Fewer Social Security benefits later on for you
- Higher health costs in retirement
- More taxes paid at a higher income tax rate than when you were working. Did you (or your advisors) forget that you most likely won’t have as many deductions when you are retired? Your kids will be grown and your house will paid off. This means your effective tax rate may rise.
Again, cash-building Life Insurance works. It can generate a revenue source that is not only not taxed, but is not recognized by Medicare.
Reason 4 – Long-Term Care
By now, the following should be common knowledge, given the readily available data often cited in the popular press. According to the Department of Health Human Services, roughly 70% of all Baby Boomers are going to need some form of LTC in retirement, and 25% of those will need to stay in a facility for at least 3 years.
Also, an annual stay in a facility will cost about $78,000 in today’s dollars. After adding in the expected inflation rate of at least 6.2% for health care, how will most people afford this?
Many people are familiar with standalone long-term care insurance policies, which have been around for years. They often provide great coverage options and are offered through some very trustworthy firms such as Genworth, John Hancock, and Mutual of Omaha. But these policies can be expensive.
The other issue with these policies is that the premiums you agreed upon paying today may not be the same later on in life. The Boston Globe wrote a piece a few years back on how certain LTC insurance carriers were increasing their rates on policy holders by as much 50% in order to keep up with their expenses.
For those who can afford these premiums today and potentially significant premium increases in the future, a standalone LTC policy may be the best option, because these policies tend to provide for the most benefits. But for many others, premium increases, especially when on a fixed budget in retirement, may not be the ideal situation. It could lead to the policy being surrendered.
The reason why Life Insurance (at least a permanent policy), is fantastic is that many of them provide the opportunity to purchase a rider that will supply long-term care coverage. This will provide a certain level of coverage in the event that it is needed. Which investment made with the premium savings of buying term insurance vs. permanent insurance can do that?
Life Insurance does have drawbacks, and there is no such thing as a perfect solution or magic potion. Before purchasing or investing into anything that can affect your future, it is highly recommended that you meet with a financial professional who truly understands retirement, mandatory health costs in retirement, and the risk of a large health cost like long-term care…if you can find one that has taken the time to learn about your health.
But again, what other financial instrument can help you:
- Control and manage all of your health costs in retirement?
- Help manage your Social Security benefit?
- Possibly lower your taxes, by providing income that is not recognized by the IRS and Medicare?
- Provide Long-Term Care coverage?
As stated, these are just four simple reasons that not one financial expert is ever going to tell you…ever and before taking the advice of so called sages of the financial industry please realize that your health is on the line.
Believe or not it will mean more than you could ever expect, but please just don’t tell the financial experts, it will ruin their sales pitch.