Financial Security and Support with Life Insurance

Cassidy

Welcome back to the sense of Security podcast. I’m Cassidy Clement, Senior Manager of SEO and content and Interactive Brokers. Today, I’m your host for our podcast and our guest is Todd Marschall, a Wealth Management Advisor at Northwestern Mutual.

We’re going to discuss life insurance. Life insurance is an important item to address in financial planning, especially when you are depended upon for financial support by a family. This topic is not everyone’s favorite to talk about, but often it doesn’t become a point of discussion until it’s too late. So with that, welcome to the program, Todd.

Todd

Great to be here. Thank you for having me.

Cassidy

Sure. So, for those of us and listeners who are not really familiar with you, what’s your background in the industry? How do you get started?

Todd

Yeah. So, I’ve been passionate about financial planning for years now. I’ve been doing this for about 13 years straight out of college, have two different designations for CFP. I’m a certified financial planner and also a wealth management chartered planner (WMCP).

Yeah, that’s a little bit of background on me. We’re headquartered out of Stamford, CT and also work out of Manhattan. We run a nationwide practice. But yeah, love the work. We do love helping clients and that’s why we wake up in the morning.

Cassidy

Great. Well, thanks for joining us. So on to the topic at hand here. Basic question, what is life insurance? How does exactly does it work? I’m sure a lot of people have heard it as a buzzword, but not everybody is totally faced with it like I said, until you actually have to make a decision.

Todd

Yeah, that’s exactly right. Life insurance for most people is not their favorite topic, but it’s really important if you have the fact pattern in your life where it becomes relevant. So life insurance in general is a product that if, God forbid, you pass away or whenever you pass away, your beneficiary receives the money. The purpose of life insurance is to provide that financial support to loved ones. Typically, there’s a number of different types of life insurance and a number of different purposes of life insurance. But at its most rudimentary form, it is to provide typically a lump sum death benefit to make up for lost income. So if you think about it- married with two children, mortgage, retirement goals, educational goals ahead of you, God forbid something happens, the purpose of life insurance is to make up for that lost future income stream.

Cassidy

Got it. So really at its core, it’s meant to help make up for that income stream with a beneficiary there for that payout and that way, correct me if I’m wrong, there are sometimes lump sum payments, installment payments, different ways that these can be paid out, correct?

Todd

That’s exactly right. Yeah. So high level, there are two major types of life insurance. You have term insurance, and you have permanent insurance. There are pros and cons to each and I’ll go through them.

So term insurance when most people think about life insurance, they tend to think about term insurance. It’s very straightforward. You pick the level of coverage that you want or the amount of life insurance that you want. And you determine the window of time in which you need it.

Typically, it’s a 10-year policy, a 20-year policy or a 30-year policy. Very often people will have coverage through their employers, at which point the typical length of that term is your employment with that company. And the idea behind term insurance is in the unlikely event that you pass away during that period of time, the life insurance proceeds are paid out to the beneficiary.

Now, because that policy is only set for a finite period of time, it’s a relatively low likelihood that an individual passes away while the term insurance is enforced, but again, it’s to protect against an event that is relatively low probability with a high financial impact on family or loved ones, or on dependents.

Cassidy

Got it. So I’m guessing you deal with this question all the time, but a lot of people look at it like “why do I need life insurance right now?” depending on where they are in their lives, especially if you’re just starting out as you mentioned through your employer.

Let’s say you’re fresh off the graduation stage and like, “why do I need life insurance?” What is your normal response to something like that?

Todd

Yeah, look, not everybody needs life insurance. That’s the first thing.

But in general, if there is one or more people in your life that would be financially impacted, inversely financially impacted by you passing away, that’s when life insurance becomes more important. It can be something like having children, it could be having parents where something happened to the child that they support parents or loved ones or something like that.

You might have shared debt with another individual. You could be a cosigner on a student loan, or you could be on a mortgage. But again, at its core is if you pass away and if there is an adverse financial impact to somebody else, that’s really when you need to start thinking about life insurance.

Cassidy

So how would somebody actually go about getting a policy? Obviously there’s a ton of information online. There are always long applications that you could fill out or some ideas for quotes, but how would somebody go about getting a policy?

Todd

Yeah, there’s a few different ways. One is you can work directly with financial advisor. That’s typically what I recommend, because there’s lots of different nuances to different policy structures and amounts. And it’s helpful to work with a professional to determine what is the right type of policy. What’s the right amount of coverage? How long might you need it for? Certain companies will allow you to go online and buy it directly. But in general, the basics of obtaining the policy is you go through one of those two routes, and you have to go through medical and financial underwriting.

Basically allowing the insurance company to do their due diligence to determine what the premium will end up being based upon, again, the amount of coverage that you have and the type of life insurance product that you end up selecting.

Cassidy

Understood. So basically, your background for your health and some other types of history or data points about yourself personally will help define some of the other details about the policy and how they’re structured, correct?

Todd

That’s exactly right. And within medical underwriting that’s where the insurance company may charge different premiums for people of different levels of health.

If you have increased mortality factors, if you’re a tobacco user, the premium for the same policy is going to be more than somebody else applying for the same policy that might be in premiere best health rating.

Cassidy

So you keep bringing up this word premium.

Could you define for our listeners what is a premium? How long do you pay these premiums for how they’re derived?

Todd

Yeah, absolutely. So, the premium is just what the insurance company charges to allow you to have the coverage. Now based upon the amount of coverage that you have, obviously if you have more coverage, the premium is higher. Or if you have a policy that’s going to be enforced for a longer period of time. because you have that coverage for a longer period of time, the premium is longer.

So, for instance, if you compare two different term policies, one with a 10-year term and one with a30-yearr term, the 30-year term premium is going to be higher because you have that coverage for a longer period of time.

There are also certain forms of life insurance, certain forms of permanent life insurance that don’t expire. And if you’re going to have a policy that’s going to cover you for your entire life, there’s a higher likelihood or a potential guaranteed outcome where at some point in time you’re going to pass away at some point in time, the insurance company will be paying out that benefit to the beneficiary. So, because of that, the premium is higher.

Cassidy

Got it. So, is there any potential for those premiums to change overtime, maybe defined by the type of life insurance you got or anything like that?

Todd

Yeah, absolutely. That’s a really important factor, again to a previous question, how do you obtain a policy? That’s one of the reasons why you might want to go through an advisor or through a professional. Certain premiums are guaranteed, certain premiums are non-guaranteed. Again, it depends on how you structure the policy.

Typically, if you have a guaranteed premium, the premium is going to be higher than if you have a non-guaranteed premium because the consumer is absorbing more of that potential risk, potential upside potential downside.

Cassidy

So if you actually had to ever see one of these policies go into effect, how exactly are those benefits paid out?

Todd

As in, when a person passes away. How would the benefits be paid out?

Cassidy

Yeah, so if the time comes that the policy becomes enacted, how exactly would those benefits be paid out? Is it possible for them to be split? Is there any type of tax implication, things like that?

Todd

Yeah. So, when the life insurance death benefit is paid, first off, it’s typically paid without the impact of taxes, so there’s no capital gains tax. There’s no ordinary income tax on the life insurance proceeds. There are certain situations where it could be subject to a state tax, but the benefit is paid directly to the to the beneficiary, to the direct beneficiary of the policy.

You also have the ability to list a contingent beneficiary or multiple direct beneficiaries and multiple contingent beneficiaries. The reason why you might want to name a contingent beneficiary and why it’s often times best practice is very frequently people buy life insurance policies and they don’t review them very frequently.

And sometimes the direct beneficiary will pass away before the person that has the policy passes away. And that’s why you have that contingent beneficiary that the next person in line is to receive those life insurance proceeds.

Cassidy

So with that benefit payout, it would be in an installment or an annuity, is that correct?

Todd

It’s typically a lump sum. Different insurance companies operate differently. Almost always the default option is a lump sum and then certain insurance companies will allow the beneficiary to decide if they actually want to obtain the benefits of the lump sum. Do they want to have an income stream or annuity payout? Do they want to take that money immediately, or do they just want to leave that with the insurance company while they’re trying to sort out other issues? But I would say by and large, a lump sum death benefit payout is the most common option.

Cassidy

Understood. So I’m sure you’ve come across this type of question, whether you’re at a BBQ or a dinner party. Anything where people ask, what do you do for a living? But what would you say are some key points to pay attention to when comparing life insurance policies, given the line of work you’re in, you probably see a ton of different policies, and people will probably come to you with many different questions with your line of work.

Todd

Yeah, there’s a lot of nuance to it. There’s a lot of nuance to determine what’s the right amount, what’s the right product? Also, the carrier that you choose is very important. Very often the least expensive carrier isn’t always the best choice for people.

Sometimes it is, but sometimes it’s not. Again, it’s more than just the premium.

So I would say key points to be mindful of when you’re choosing the insurance company that you use..

 1.) the financial strength of the insurance company. The reason why people buy insurance is that when those unfortunate events happen, you want that backstop to be there. You want the insurance policy to be there. You want to make sure that you have an insurance company that has good financial strength.

And there are a number of different ways that you can measure that; a lot of public information around that.

Another major factor is the is the company composition. What I mean by that is you have certain stock-based insurance companies and you have certain mutual insurance companies. A stock-based insurance company is owned by the shareholders. A mutual insurance company is owned by the policy holders. And with that, there’s an alignment of interest, different company incentives, again with different company structures.

Doing your due diligence on the insurance carrier itself is important and there’s a number of good high-quality carriers out there.

Cassidy

So when it comes to looking at a policy for yourself, maybe some things to consider based on our conversation today, I have in our notes, look at your term length, your coverage amount, your health or the average cost of your policy.

Are there any other pieces that are personal to the person or to the situation that you think sometimes people don’t always think about when it comes to a life insurance policy?

Todd

Yeah, I’d say there are two things that are that are tough for people to calculate themselves. Maybe three. One is what is the right amount of coverage? Because there is a time-value money calculation.

Often times there are multiple different factors that will go into determining what is the right amount of life insurance. You might say, look, I want to protect 20 years of income, I want to make sure my kids can go to college, I want to make sure that the mortgage can be paid off. Well, actually, calculating what the present value is of that number is important.

Two, I think it’s something that’s important to review periodically, not to say that you need to be pulling out and double checking your life insurance policies every week. But periodically you want to double check it. Make sure it’s still the right amount of coverage, you have the right type of coverage, and make sure your beneficiaries are still correct.

And then the third thing that’s important to figure out is really determining how long you want to have the coverage for? Because people’s situations change and evolve over time, and you might think that you only need the policy for 10 years or 20 years, and maybe for a chunk of the coverage, that’s all that you needed.

But there might be a portion of the coverage that you want to never expire or that you might want to have permanently. And in general, as people get older, (A) the cost of life insurance becomes more expensive and (B) oftentimes people get less healthy the older that they are.

So there can very frequently be a benefit to locking in a policy when you’re younger or when you’re healthier, protecting your insurability so that you don’t end up with a risk of buying a policy that then you get through that 10- or 20-year period, and you’re forced to reapply and you’re forced to re-apply for coverage later on in life. When, again, you’re older and potentially less healthy and the premiums are significantly higher at that point.

Cassidy

Well, I think you brought up a lot of really good points for people to use when considering looking at plans or what fits their current situation and what flexibility they need depending on where they are in the number line of age. But these were all great points, so thank you for joining us today, Todd!

Todd

Absolutely. Yeah, like I said, thanks for having me!

Cassidy

Sure. And as always for our listeners, you can learn more about an array of financial topics for free at IBKRcampus.com. Follow us on your favorite podcast network, and feel free to leave us a rating or a review. Thanks for listening everyone!

Todd Marschall’s LinkedIn:

https://www.linkedin.com/in/toddmarschall/