Life Insurance

Life insurance is a product that can replace your future income to the people in your life relying on that income in the case of your demise. That’s it! In a general sense, if nobody is depending on your income to survive, then (in many cases) life insurance may not be the best option for you.

Life insurance can get confusing, and some of the fallacies around these products can lead to a poor decision. The intention of this post is to get a basic understanding of life insurance, and to help guide your thought process when determining if it makes sense for your situation. There are two main types of life insurance: term life insurance, and permanent life insurance.

When considering life insurance, term life insurance is what most solos are looking for. Don’t forget, this is a product intended to replace our future income for those who need it to get by. In the case of our untimely demise, we don’t want to leave our loved ones in the lurches! Savvy Solos without dependents or outstanding debt usually wouldn’t see much benefit here.

Generally speaking, you’ll buy a policy (usually in 10-, 20-, or 30-year periods) and pay a monthly premium for the duration of the policy. In the case of your passing during this time frame, your beneficiaries will receive the predetermined death benefit. The longer your policy, the higher the premiums; but the premium will not change for the duration of the policy.

There are many factors that go into the cost of your premiums, mainly your current age and health. The more likely you are to utilize the death benefit, the higher the premiums will cost. Don’t forget, life insurance companies aren’t a charity, they are out to make money like everyone else. If all goes according to plan, the policy will end when you and your dependents are all financially stable. It’s a little odd to pay for something you hope to never use, but in all honesty, this is a win-win scenario for everyone involved!

Permanent life insurance comes in many names and forms. Instead of paying premiums for a set term, they are paid for your entire life. Much like term policies, there is a death benefit for your beneficiaries. Unlike term policies, there is usually a cash value and/or investing component to it that will add to the death benefit. Depending on the type of permanent life insurance, it may pay a dividend or offer opportunities to borrow against the policy while you are still alive and kickin’. In other cases, a permanent life insurance plan may offer tax incentivized plans to assist in retirement.

Regardless of the type of permanent life insurance, the vast vast VAST majority of people (solo or otherwise) would be better off steering clear of these. You may hear terms like: whole life insurance, universal life insurance, variable life insurance, or even some combination of these terms (variable universal life insurance or indexed universal life insurance). What just about all of these policies have in common is high commissions for the life insurance agent, which results in high fees for you.

I once heard someone say that if you have to be sold a product, you probably don’t need it. This has never rung truer when it comes to permanent life insurance. A slick salesperson may be able to sit you down and make these policies look appealing, don’t fall for it! Let me say it again for those in the back:

If you have to be sold something, you probably don’t need it!

You like cotton candy, and you like ham sandwiches, right? How about a cotton candy ham sandwich absolutely dripping with mayo!!!! No? I didn’t think so. 🤪

We should all be looking at insurance and investing as differently as we do cotton candy and ham sandwiches. Each are enjoyable, and each have their place… but it’s usually best that they don’t intermingle. Most will see better growth if we keep our investments with a low-cost brokerage (like Fidelity, Vanguard, etc.) at one side of the table, and keep our life insurance (hopefully term life insurance if any) at the other side of the table. The ongoing fees with these permanent life policies are substantial, and the cost of getting out of them is even greater! 😬

There is a newer product on the market out there called infinite banking. New name, same concepts. Insurance is there to protect you in the case of a bad scenario, not an investment tool for your future. I doubt you are going to ask your car insurance agent about retirement plans, don’t do it with life insurance either. We’ll dive deeper on why these products are not in the best overall interest for most in a future post. For now, it would be wise to get really cautious when fancy terms get thrown around that are not “term life insurance.”

When looking at different term life insurance policies, it’s important to understand how much coverage is right for you. We have decided that life insurance is needed, but (hopefully) realized that permanent life insurance isn’t the right fit. One of the old school thoughts was to simply 10X your current salary, and presto! So, if you make $100k per year, you’ll want $1 million worth of coverage.

This might be a good starting point for most, but a “one size fits all” approach rarely works. The DIME method (debt, income, mortgage and education) might give you a better idea of what you actually want. Throughout this process, keep in mind that when you die all of your assets go towards paying your debts before they go towards beneficiaries. In the case of a negative net worth, the vast majority of debts are not inherited by family members, with the exception of debts that have co-signers.

The DIME Method:

• Debt: What is your current net worth, and how much of your debt would you be leaving for others to clean up? You’ll want to make sure the policy covers this total amount.
• Income: Multiply your current income by the amount of years you intend to replace it.
• Mortgage: If you currently hold a mortgage and don’t want your family to move, it might be wise to add this to the total.
• Education: If you have children and intend to pay for their college, you’ll want to estimate the cost and add this to the total.

Of course, you’ll want to add in any other potential costs your beneficiaries might endure due to your passing (burial costs, daycare for young children, etc.), but this method gets you off on the right path.

Perhaps your youngest child is 8, you have a positive net worth that will cover any burial costs, have $200k left on your mortgage, and have no intention of paying for anyone’s secondary education. If you are currently making $100k per year, you may want to look at a 10-year $1.2 million policy ($100k X 10 + $200K mortgage).

Different insurance companies are going to offer different rates. Once you determine the coverage you are looking for, shop this around just like you would a car insurance policy. Don’t get distracted by the bells and whistles certain companies might offer, especially when things start to rhyme with permanent life insurance. You know what you are looking for here, stand firm! Utilize the same principles you would when buying a vehicle.

While term life insurance might make a lot of sense for certain solos, permanent life insurance rarely does! There’s even a baby food company out there (cough cough, it rhymes with berber 👀, cough cough) that is selling life insurance products for babies! Uhhh, remind me again how much income your baby is producing for your household? None? That’s how much life insurance they need. 😂 Don’t get suckered into sleezy sales tactics, there are far better ways to create generational wealth than some form of permanent life insurance.

Personally, I think there are only two scenarios that a Savvy Solo should actually consider life insurance at all:

1. You have dependents that rely on your future income (children or otherwise).
2. You have more liabilities than assets, and these liabilities will not be discharged at the time of your death.

So, if the Savvy Solo has children, that’s an obvious one. But beyond that, if you have parents or relatives that are relying on your income to survive, you’ll want to work the math out here. Get a few quotes, consider your current net worth, and see if investing the $ in premiums would ultimately allow them to continue living at the same level they are today. If not, term life insurance might make sense.

Let’s say we have a young solo MD who has a tremendous amount in student loans (co-signed by the parents) and a negative overall net worth. If it’s looking like these loans are going to take 3-5 years to pay off while they get on their feet, it might make sense for this young Savvy Solo to take out a term life insurance policy. The younger and healthier a person is, the cheaper these policies are. So, having this coverage in place to protect the parents would make a lot of sense, and wouldn’t be too much of a financial burden for the time being.

You ever watch Forensic Files, Snapped, or any of those murder docs? There are always a few episodes where someone kills their spouse to get the life insurance money. Sometimes for as little as $30k or something stupid. 😶 It never actually works out for the killer (at least not in these shows), but GOD do I love being single! 😂🤪😁

In all serious though, term life insurance could be the right answer for certain Savvy Solos given the circumstances. If you are anything like me, with a net worth north of any real burial costs and no dependents to worry about, life insurance may not be necessary. Disability insurance is really the one that many solos need to focus on, we’ll go over that one in more detail in the future.

Instead of permanent life insurance of any kind, most would be better off exploring Trust options if considering this for legacy reasons. You’ll also want to have a standard Will in place in order to divvy out your assets. If considering for retirement or “borrowing against yourself” type reasons, the majority of people would be better off utilizing more standard investment vehicles to protect and grow their net worth. I have personally yet to see a single situation where permanent life insurance actually made sense, but if you feel different… COME AT ME BRO!

😂😂😂

Stay classy Solos! ✌️