When planning for an ideal retirement, we act from three core values: plan, prioritize, and protect.
-Getting the right level and type of insurance is a key step towards protecting your retirement.
There are four main areas of insurance that you can use for protecting your retirement: life insurance, long-term care insurance, disability insurance, and health insurance.
Today, we’ll be covering life insurance and long-term care insurance. What do you need to know about each insurance type to make an informed decision about which one is right for you?
Read on to get started!
There are two major types of life insurance: term insurance and permanent insurance. The names of these insurance types refer to the period of time they cover.
Term insurance is for a temporary need, like if you only need insurance over the next 10 or 20 years. Just like with your car insurance, if you have a policy and you’re paying for it, then you’re covered. But if you stop paying for the policy or the term ends and you don’t renew it, you’ll lose that coverage.
Meanwhile, permanent insurance is for covering a long-term need that goes beyond 10, 20, or even 30 years. Sometimes this type of insurance may even be introduced to you by your advisor or estate planner as an option to help you transfer your wealth to your kids and grandkids.
When it comes to choosing between these two types of insurance, we believe that if you need coverage on a temporary basis, like for covering your mortgage or protecting your kids until they graduate college, term insurance is the way to go.
If you want a permanent type of insurance because you want to leave behind a certain dollar amount and there’s some estate planning you’d like to do, then permanent could be the way to go.
Choosing between term and permanent insurance comes down to understanding your options and seeking the right guidance to make the best choice for your needs.
To add to the complexities, there are also various types of permanent insurance, including whole life insurance, variable insurance, and universal insurance. You should know the key differences before buying permanent insurance.
Whole Life Insurance
This is the original type of permanent insurance. It has been around for quite some time, has a lot of guarantees within it, and builds up cash value. With whole life insurance, whatever they tell you, it's guaranteed. It's very stable and chances are fairly good that you might also get a little bit of interest or dividends.
You might want to buy whole life insurance if you're looking for an option that's low maintenance and where you know what to expect with it.
Universal Life Insurance
With universal life insurance, on the other hand, you don’t get the same guarantee. You get an interest rate just like you would with whole life insurance, but it’s not a certainty. Instead, the interest might go up or down.
Because this type of insurance was developed to be this way, universal life insurance also offers a lot more flexibility. When interest rate goes up with universal, you, in turn, can likely stop paying as much money into the plan — whereas when whole life interest rates go up, you have to keep on paying.
So when you hear the word universal, think flexible. This is because your premium payments and the amounts you pay could change along with your interest rates.
However, because of its flexibility, and because no one knows what’s going to happen over the next 50 years, when you get universal life insurance, you have a lot more responsibility and need to make sure you’re checking your annual statements. Just like we said increased interest rates could help you lower your premiums, it’s important to see if the costs have changed, or interest has gone down because that means you may have to pay more into your policy.
For example, there have been a lot of stories over the last few years about people who have reached their 80s or 90s and thought they had an insurance policy, when, in fact, their policies actually ran out. That's because they may have switched from the old type of whole life insurance to the new kind, universal life, and they may not have been paying the premiums the way they should have been. Or, sometimes when people received projections on their interest rates, it was decades ago and the projections may have been a little too rosy and are no longer the reality.
That's why it's so important that every year, you’re checking that statement and looking at what your interest rate was and how much premium you’re supposed to be paying to make sure you’re still covered and paying what you need to.
You might want to buy Universal life insurance if you want more flexibility than whole life insurance.
Variable Life Insurance
Variable life insurance is a type of insurance where the cash value that is building up is in the stock market. With this type of insurance, it's not just the interest rates that you have to worry about, but also the stock market and what it’s doing. Because of this structure, you could get a better return in the stock market than you would with the other types of full life insurance and the interest rates from the universal, but it could also go the other way.
When it comes to life insurance, none is really ‘better’ than the other, but it is important that you understand what the insurance you choose actually means and make sure that you review your statement every year to see if the interest or the returns came out the way it was projected and what changes you might need to make.
You might want to buy Variable life insurance if you’re trying to find another place to invest money into the stock market. Usually you would look into this insurance after you’ve maxed out your 401(k) and Roth IRA investment opportunities.
Long-Term Care Insurance (we should give terms here too)
In one of his books, Dave Ramsey writes that as you approach 60, you need to look at long-term care insurance. But this advice was given back in the late 90s and ever since then, the long-term care insurance market has completely changed. Interest rates are very different, along with how many people offer long-term care insurance and how difficult it is to actually get this type of insurance.
So now, 20 years later, we recommend looking into long-term care insurance once you hit 50, another trigger for starting to look at this type of insurance could be when you’ve finished paying college tuition bills for your children. When this happens, you’ve likely freed up some cash that you can then put towards other areas, like long-term care insurance.
As with life insurance, we don't believe that you need to have long-term care insurance. But we do believe that you need to have a plan. It’s important to talk it over with your advisor and your spouse and to plan around what's going to happen when one of you needs some sort of care. Are you planning on taking care of each other? Are you going to ask one of the kids to help out? Are you going to move someplace? Have a plan around it. That's step one.
Step two is figuring out how you are going to pay for or fund that plan. You might choose to pay with some extra cash you’ve saved up. Or, if you don’t want the cost to come out of your pocket and you understand that this need for care may or may not happen, you might rather have insurance come in and help you out with this.
20 years ago, there was just one type of long-term care insurance. It was kind of like your car insurance where if you didn't use it, you got nothing out of it. They didn't give any refunds even if you didn't have any sort of need for the insurance. Now, more plans are trying to find solutions so that if you don't need the insurance and if you don't have a claim, then perhaps your spouse, your kids, or someone else can get something back.
However, this hybrid option can be a lot more expensive. It’s a push and pull with many of these insurance options in which everything is a trade off.
If you want the less expensive version and you want more bang for your long term care insurance buck, that's when you might want to look into the straight, traditional long-term care insurance.
But if you want something back, you can get this hybrid type of insurance where if you didn't get paid out as a long-term care claim, you might be able to get paid out as life insurance when you pass away. This is something that, again, you need a trusted professional to help you look at to decide what’s best for you.
Obviously the difference between the different types of life insurance and long term care insurances can get complicated, and there are many different companies that offer these insurances.
When you’re trying to figure out what insurance you need remember to:
Find someone you can trust to help you figure out if you need insurance.
Determine what type of insurance you might need.
Decide which company to buy insurance from.
At Keil Financial Partners, we have experts that specialize in life insurance and long-term care insurance, deal with all the different carriers or insurance companies and have a deep knowledge and understanding of your insurance needs and all the possible solutions.
To learn more, be sure to tune into Podcast 12 of Retirement Revealed with Jeremy Keil, and feel free to reach out to us with any questions. Plus, watch out for part two of our insurance mini-series, where we’ll be covering two more types of insurance: health and disability insurance!