When planning your ideal retirement, Keil Financial Partners believes you should focus on the three P’s: plan, prioritize, and protect.
Today, Jeremy Keil highlights a tool you can use to help protect you and your finances: insurance. In part one of this two-part series, Jeremy breaks down two types of insurance, life insurance and long-term care insurance, what they are, and considerations around each.
In this episode, you’ll learn:
The difference between term insurance and permanent insurance — and how to choose between the two
Types of permanent insurance: whole life, universal, and variable
Why you should be checking your insurance statements every year
When to start looking at long-term care insurance
Tune in now to learn the ins and outs of life insurance and long-term care insurance so you can be better informed when choosing protection for you and your ideal retirement!
The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Keil Financial Partners. Keil Financial Partners is a part of the Thrivent Advisor Network, a registered investment advisor. The Content has been made available for informational and educational purposes only. The Content is not intended to be a substitute for professional investing advice. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.
Keil Financial Partners does not provide legal, accounting, or tax advice. Consult your attorney or tax professional. Representatives have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.
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Retirement Revealed Episode 12: Part 1 - Insurance is Your Protection Plan
Are you ready to uncover your retirement solution? Learn more as Jeremy Keil and his guests guide you along the path of retirement and reveal the five steps you need to take to solve your retirement puzzle. Now onto the show!
Aric Johnson: Hello and welcome to Retirement Revealed with Jeremy Keil. Today Jeremy is going to be starting part one of a two part series, and I’m going to let him explain exactly what we’re going to be talking about. Jeremy, good morning! How are you?
Jeremy Keil: Good morning, Aric. Doing well, thank you. How are you?
Aric Johnson: Fantastic! A little chilly, but I am indoors so I guess I am very happy about that.
Jeremy Keil: Yes definitely. That works out well. So we’re going to talk about insurance which is fun right? Who doesn’t love talking about insurance and spending premium dollars for something you hope you never use?
Aric Johnson: Yeah. My favorite conversation by far.
Jeremy Keil: Well, there’s taxes, and I definitely love talking about taxes. I’m not making that one up. I do love talking about taxes, and it’s very important to talk about insurance too. We mentioned a few podcasts ago some values as far as how you should look at your finances, and we used three words: plan, prioritize, and protect. This is the protection part of it. How do we protect the things that you don’t want to lose or replace what might’ve been lost?
Aric Johnson: Now this is going to be a two parter. So can you give us an overview of what we’ll be talking about in these two podcasts?
Jeremy Keil: Yeah. It’s a lot of the insurances that are related to finances that most people should have heard by now. You’ve got life insurance, long term care insurance, disability insurance, and health insurance. One part of health insurance very specifically is Medicare.
Aric Johnson: Gotcha. All right, so we’ve got four things to cover. I’m assuming we’re going to split it up two and two, right?
Jeremy Keil: You got it. Let’s talk about life insurance and long term care insurance today. We focus so much on people that are getting ready for retirement, and there’s a little bit of a misconception. A lot of people feel that when they hit retirement there’s no longer a need for life insurance. And then when it relates to long term care insurance, folks usually don’t want to even have that conversation because who wants to think about a time 20 or 30 years down the road when you just can’t do the things that you normally could do and need help in a way that you didn’t ever think you would need.
Aric Johnson: Yeah it’s definitely not a fun thing to think about, but it’s very factual for a large percentage of the population.
Jeremy Keil: Yeah, very true. So let’s just go through what we’re trying to educate folks on in order to learn more about insurance. We feel strongly that if you know more about your money, you’ll make better decisions about your money because you will feel better about it. When things are unknown, people tend to get a little anxious and shy away from it, but let’s attack it head on, educate, and make sure everyone understands how life and long term care insurance work. So we are going to throw a lot of terms out there for you and try to explain those, so if you come through and maybe don’t understand a certain term, that’s on us. So please contact us and make sure that we can give you a better explanation, but a lot of times you hear these words and it’s very good to understand what they mean. So we’ll start at the high level. Sometimes you hear this thing called “term” or “perm”. Term is talking about a length of time, so term insurance is a temporary need. So maybe you need it for the next 10 or 20 years. So just like your car insurance, if you have it and you’re paying for it, then you’re covered. If you stop paying for it or the term is over, it’s done. You don’t have it anymore. Meanwhile, perm is just the shortened version of permanent. It used to be easy, but now there’s so many different types of permanent insurance. The permanent insurance is covering a long term need. It goes past the 10, 20, or 30 years. Sometimes it’s being introduced to you by your advisor, estate planner, or estate lawyer suggesting a way to help you transfer some of your wealth. So there’s some reasons you might want a permanent insurance plan. Maybe you have these estate type situations, and if you have no idea if it’s 10, 20 or 30 years from now when your estate might show up. That’s when the permanent type of insurance comes in. A lot of people hear this word permanent, and they start thinking of another term called “whole life”. That’s the first one. That’s the original type of insurance. It’s permanent insurance, something that’s longer term. It’s been around for quite some time. It has a lot of guarantees with it. It builds up something called a cash value. One thing that’s across the board with these permanent types of insurance is that there’s some sort of cash value associated with it. It’s kind of like you have this insurance called term plus the cash value. When you hear about whole life insurance, know that it’s guaranteed. It’s very stable, and the chances are very good that you might get a little bit of interest or something. So if you’re looking for something that’s kind of low maintenance and something that you know what you can expect from it, that’s whole life insurance. Then things got a little creative maybe about 40 years ago when people were looking at these insurances and thinking, wait a second, interest rates are like 12-15%, maybe we can do better than just the normal 5-6% or whatever it was that they were paying at the time. So they came up with this new one called “universal”. Beats me where they got the name from but that is what it is. Universal is not guaranteed. You get an interest rate just like you did with the whole life, but there’s not a guaranteed situation going on there. The interest might go up, or the interest might go down. When they did that, they made it a lot more flexible. They figured that if the interest rates go up that maybe you could stop paying as much money into it. With whole life, if interest rates go up, you have to keep on paying. So they just tried to make it a bit more flexible. If you hear the word universal, think flexible because both your premium payments and interest rates could change. And guess what, that means that it is on you to manage this. With whole life, they will give you this contract that says how it is going to work out over the next 50 years. With universal, you don’t know what’s going to happen in the next 50 years. So when you find yourself with universal life insurance, you’ve got a lot more responsibility, and you need to make sure that you’re checking your annual statement. You get an annual statement every year. Check that every year, and oftentimes you need to ask the insurance agent for a projection in order to get an idea if the current interest rates are going to keep up with the way they were projected or if you need to put more money into the account.
Aric Johnson: So can you explain what you mean by “not guaranteed”? I mean, if something happens, they have to pay it out right?
Jeremy Keil: Well, if you have an account at the time, they will say from the day you start to the day your life is done, here’s exactly how this cash value is going to grow. Here’s exactly how much insurance you have with the universal life. Let’s just say you have a $100,000 policy. They’ll say, well, based on today’s interest rates and based on the premium you’re planning to put in, we think it’ll run for the next 60 years. They say they think it will work out, and a lot of times it can. The problem is that interest rates could go up or down. When people hear that they won’t have to put in this premium, sometimes they don’t. So interesting enough, there’s been a lot of press in the last few years saying for example that this lady reached her 80s and thought she had an insurance policy, but actually it turned out that the insurance policy ran out. And that’s because she may have switched from the whole life over to universal, and she may not have actually been paying the premiums she should have been. She probably started this back in the 80s, and the interest rates were 8-10%. The insurance agent said that they would be doing great as long as the interest rates stay around 10%. Well guess what? You’re in 2020 and they’re not 10% anymore. So it’s just unfortunate that these projections may have been a little too rosy just because that is what the interest rates were at the time. Sometimes we hear people say, well, I’ve had this for 30 years. It should be running fine. But it’s not a time thing right? If someone had a car for 30 years and never put gas in it, it’s not going to run. So it’s not this time thing. It’s a matter of did you follow through with those premium projections? That’s kind of on the insurance holder in a way. On the company side, if their interest rate projections don’t keep up, did they alert you somehow? So that’s why it’s so important every year to check that statement because it’s going to tell you what your interest rate was. It’s going to tell you how much premium you’re supposed to be paying. You may or may not be doing that, but you are supposed to be putting in a certain premium every year. It should also tell you a projection of how long your account will run through based on a certain projection of interest rates and premium payments. If it’s running out at age 85 and you think you might make it past, then there is something that you have to adjust. Really the only thing you can control is how much money you put into that account if you want to keep it going.
Aric Johnson: Yeah. All right.
Jeremy Keil: Then there’s another type that’s very similar to universal called variable. So with universal it’s very flexible. You could change your insurance amounts up or down. You can change the premium up or down. If you skip one, you can pay it next month. There's a lot of flexibility there, but then you add this extra wrinkle called variable, and variable means it’s actually in the stock market. So it’s not just the interest rates you’ve got to worry about, it’s the stock market. And that could work out right? You could get a better return in the stock market than these interest rates from whole life and universal, but it could go the other way. So whether you have whole life, universal, or variable, understand what it actually means and make sure that every single year you’re taking a look and seeing the statement. Did I put in the right amount of money? Did the interest or the returns come out the way it was projected and what changes can I make if I need to?
Aric Johnson: Yeah, I was going to just ask you about changes. What happens if somebody is reviewing this and they say I better go take a look. Maybe they’ve got universal and they think that variable is in their best interest. What if they want to change from a universal to a variable policy. Is that even possible? Can you take a phone call on that?
Jeremy Keil: Oh yeah, I’d be happy to take a phone call. You have to find someone you can trust about that. A lot of times when you’re talking to the insurance agent, they make more money on a new insurance policy than they do on keeping you in the old one. So it’s good to have one that you can trust, but at the same time you have to take their advice with a grain of salt when they are talking about these recommendations. They might not be making a commission on the one you have had for 20 years. But there might be a commission generated when you switch to a new one. So if they are talking to you and recommending a change, I think it’s a good idea to ask them how much they are making off the change. If they’re making a huge commission, that could color their recommendation. It’s also interesting that each different company might have different rules on whether you can go from one account to the other type of account. Typically when you buy a brand new one you have to prove that you are insurable and healthy. You might’ve bought this when you were 25 and now you’re 55 and you have to prove that you’re just as healthy or healthy relative to every other 55 year old out there. It’s interesting too, a lot of people are saying never buy permanent insurance, and we don’t necessarily believe that’s the case. We think if you need something on a temporary basis, term insurance is the way to go. Maybe you want to cover your kids through the end of college. But maybe you have this desire for permanent insurance because you want to leave a certain dollar amount. There’s some estate planning going on there. Well, if it’s a permanent situation, you need permanent insurance. So just understand what you need this account for. Understand that the person recommending it to you may have a little bit of incentive to recommend one thing over another. If you need something on a temporary basis, get the term insurance. If you need something on a permanent basis, get the permanent insurance. But now you just understand and realize there’s three different types of perm insurance, and now it’s a matter of finding that one that matches up with how willing you are to take on some of the risk yourself or how willing you are to take on some of the risks in the stock market or the interest rate market.
Aric Johnson: Yeah. I had term insurance when I was younger because I didn’t make very much money, but also I had young children. So that was a good way for me to replace my income. This ability to pay off all of our bills and give my wife a monthly income alongside her income gave my wife a lot of peace of mind. Like I said, I had young children. We wanted to get them into school. So then maybe she could work some part-time hours and still be there for the children. It was much cheaper at that point for me to get term insurance than it was for permanent. Is that kind of still the case where because whole life and these other ones build some cash value that the term is quite a bit cheaper?
Jeremy Keil: Well it is almost always cheaper today to buy that term insurance than to buy the permanent insurance. The issue is that 10, 20, or 30 years from now, whenever that term insurance is up, you have to buy new term insurance. Meanwhile, that perm insurance probably costs you more to begin with. So maybe perm insurance costs you more today, but then 10, 20, or 30 years from now when your term insurance is done and you have to buy new insurance, it may have just been cheaper to buy perm insurance to begin with. So there’s always this debate back and forth or do you buy term and try to invest for later on, or do you pay the higher price now and kind of lock it in? It’s a debate that I don’t think anyone will ever solve. We just believe that if you need something on a temporary basis, you should get term insurance. If you decide with your spouse that you want to have a specific dollar amount for your whole life, then you should go with the permanent.
Aric Johnson: Gotcha. All right.
Jeremy Keil: Yeah. Let’s transition. Let’s talk about this other area called long term care insurance. I’m sure you have heard of Dave Ramsey. He talks a lot about insurance, and when it comes to long term care insurance he says that as you approach 60, you need to start looking at long term care. Now, what’s interesting is he wrote that back in the late nineties, and ever since then the long term care insurance market has completely changed. There’s a whole different situation going on with interest rates, with how many companies even offer the long term care insurance, and how hard it is to actually get the long term care insurance. Sometimes you run into folks that had this number in their head, saying they are not going to look at it until they are 60. We think you ought to be looking at this as you hit 50. Or maybe you’re done paying the college tuition bills. Maybe it’s time to just reevaluate your financial situation, and that’s maybe a good time to look at long term care insurance. In a way, you’ve freed up some cash because you got the college bills over with, and you might have some cash available then to put towards some other areas. Long term care insurance is one of them. And again, we don’t have this belief that you need long term care insurance, but we do have the belief that you need to have a plan. So talk it over with your advisor and spouse. What’s going to happen when one of us needs some sort of help? Are we planning on taking care of each other? Are we going to ask one of the kids to help out? Are we going to move someplace else? There’s all these different residential facilities that you can move to in order to get different types of care. Have a plan. That’s step one. Step two is figuring out how you are going to actually pay for that plan. You might say well, I’ve got some extra cash I’ve saved up very well, we’ll use some of that money. Or maybe you are going to move, so that frees up some cash from your house. That might be a way to do it. Or other times you might not want to fund it out of your pocket, so in that case you might have the insurance company come on in to help you out with that. So if that’s the decision you make, let’s talk about the different types of insurances. 20 years ago it was kind of easy. There was just one type of insurance called long term care insurance. It’s kind of like your car insurance. If you didn’t use it, you got nothing out of it. They didn’t give any refunds for the fact that you didn’t have any sort of need for the insurance. Now a lot more people are thinking, well, what if I don’t use this? And they are trying to find a way so that if they don’t need the insurance and they don’t have a claim, the money goes to someone other than the insurance company. But when you do that, it’s a lot more expensive. It’s kind of like that term insurance versus permanent insurance. The term insurance is cheaper because if you don’t use it, you’re done with it. The permanent insurance costs more because the insurance company says, hey, somebody is getting this money at some point in time, so they’ve got to set aside enough money, which means they’ve got to charge you enough to make sure that is set aside for you. So it’s a tug and pull, right? Everything’s going to be a trade off. If you want the less expensive version, more bang for your buck, that’s going to be the pure, traditional long term care insurance. But if you say, I want something back. Well then you have to get this hybrid type of insurance where they say, well, if that didn’t get paid out as long term care insurance, maybe it gets paid out as life insurance when you passed on if you never used it.
Aric Johnson: All right. Gotcha.
Jeremy Keil: So that’s something again where you need this trusted professional. For us, we actually refer all of our folks to a company called Newman Long Term Care. They only deal with long term care insurance, and they deal with all of these different carriers. That’s a fancy name for an insurance company. So when you come in as a consumer saying I’m concerned about this and I want to have a long term care insurance solution, they understand and they can figure it out. They will say, based on what you are looking for and based on what you need, here are your options. Are you going to be leaning more towards that pure long term care insurance area or more towards this hybrid long term care insurance area? Based on that, we can get some education going on. Here’s how the pure insurance works, and here’s how the hybrid insurance works. I’m just going to talk real quick about some terms that you might see when you are looking at either one of those. With pure insurance, I just want you to think of three phrases: benefit amount, benefit period, and elimination period. I can’t think any other time we’ve ever talked about those three phases right? You don’t run into those phrases too often. Benefit amount is the dollar amount that is going to pay out to you. If you have a claim they might pay out $2,000 or $4,000 a month, whatever it is that you sign up for. The benefit period is how long they are going to pay it out to you. Elimination period is just a really fancy phrase for deductible. When it comes to long term care insurance, it’s a time situation. You are going to need the care, but for a given amount of time in the beginning, you are on the hook for the bills, whether it be 30, 60, or 90 days. After that point they kick in and start paying it afterwards.
Aric Johnson: Gotcha. Okay.
Jeremy Keil: Yeah. When it comes to the hybrid type of insurance, again, a lot of people look at this because they want something to come back in case they don't use it, well that something is usually either an annuity or life insurance. So if you're buying this hybrid of an annuity and long term care insurance or a hybrid of life insurance and long term care insurance, how many things are you really buying into, right? It is two things in one, which means it's going to cost you more, right? Just keep that in mind if you're trying to get more than the regular amount. If you are trying to get more benefit than the long term care insurance will provide on its own, it’s going to cost you more. So that's just something that we want you to keep in mind. There's pluses and minuses. There's tradeoffs everywhere. So have your financial advisor and insurance specialist help you figure out which one of these is going to be better in your situation.
Aric Johnson: Yeah. I mean I'm sitting here listening thinking, wow, this is really complicated. There's a lot of information here. There's just no way that I'm going to take the time to research all of this stuff. So I would definitely be calling in the pros because it's like me trying to take apart an entire engine by myself and put it all back together from memory. No, I’ll just hire a mechanic.
Jeremy Keil: Yeah. I’m going to share a couple of gripes here, Aric. I don’t like to get negative, but these examples might be helpful. Sometimes we hear people say that they are going to self-insure. And you know what? That’s impossible. You can’t self insure. Insurance means there’s more than one person, right? If it’s just you and your spouse, you cannot self-insure. What you are really saying is that you are going to roll the dice. I'm going to take on the risk versus offloading that risk to an insurance company. So that’s an OK decision to make, but just understand that you are taking on the risk. Well another thing that bothers me, especially because I’m on the investment committee for a nonprofit that provides these types of cares, but we hear people say that they don’t want the nursing home to get all my money. It’s like the nursing home walked in and robbed you of all your money. Nursing homes are great places. You’re there because you need the care. You might not want to be there, but it’s not their fault that you got there. You’re in there, they’re providing a service, and because they are providing you a service that you need, they deserve to get paid. So when people say that, they are making the nursing home the enemy, but there are a lot of good people at those nursing homes. And yes, there is a cost for the care. So please don’t think that the nursing home is the enemy. Please understand that failing to plan is the enemy. Failing to plain is what created the crisis, not the nursing home. They’re great people. They’re trying to take care of you. They’re trying to take care of grandma.
Aric Johnson: Exactly. It’s so interesting that you said that. I talked to a gentleman this morning whose wife is in a nursing home. They don’t have insurance for it. So he is self-funding. He’s paying the cost of $300 per day. It’s almost $10,000 per month. I wouldn’t be able to afford that.
Jeremy Keil: Yeah definitely. And that brings me to my last point. When you are thinking about long term care insurance, it’s really thinking about what is going to hurt worse. What is going to feel worse? Is it writing out that premium check? And sometimes people say, well, that insurance is expensive. Well, it’s not as expensive as actually writing the check for the nursing home or assisted living or whatever it is. You’ve got to decide once you’ve kind of educated yourself. It almost gets down to what’s going to hurt worse for you. Is it going to be more painful to write out that check at the front and pay the premium for long term care insurance? Or is it going to hurt you more later on when you’re writing that check for $300 per day? Whichever way you’re feeling, that might just tell you right there if the insurance part is going to be a piece of your financial puzzle. Are you going to let the insurance be there to help pay for it, or are you going to be somebody that is taking the chance that you might be self-funding later on?
Aric Johnson: Yeah. Lots of food for thought. Jeremy, again, as usual, I know we're talking about two other items on the next podcast and that is health insurance and also disability. So I'm looking forward to that because I'd like to learn more about disability for sure, and health insurance is always a hot topic, especially politically. So I know we've got a lot to cover there, but are there any closing thoughts for today before we wrap up?
Jeremy Keil: Yes. Last one is just that everything has tradeoffs. Term insurance is cheaper, but it ends. Perm insurance is expensive, but it lasts. You might lose your long term care insurance if you don't use it, but if you buy the other kind, the hybrid, it's like you're buying two insurances instead of one. So there's not going to be this magic bullet, a something for nothing situation. Figure out with your financial advisor what's going to be the worst case scenario and protect against that. That's the way to look at it. It's not a matter of what costs you more or cost you less. It's a matter of what's going to be covering and protecting the things that you need protected.
Aric Johnson: Yeah, absolutely. All right Jeremy. Thank you so much for your time, and I want to thank the entire audience for listening to the Retirement Revealed podcast with Jeremy Keil. If you have not subscribed to the podcast yet, please click the “Subscribe Now” button below. This way, when Jeremy comes out with a new podcast, it'll show up directly on your listening device. This makes it much easier to share these podcasts with your friends and family. Again, thanks for listening today. For everyone at Keil Financial Partners, this is Aric Johnson reminding you to live your best day every day, and we'll see you next time.
Thank you for listening to the Retirement Revealed Podcast. Click on the subscribe button below to be notified when new episodes become available. Visit Retirement-Revealed.com to learn more. The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Keil Financial Partners. Keil Financial Partners does not provide legal, accounting, or tax advice. Consult your attorney or tax professional. Representatives have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration. Keil Financial Partners is a part of the Thrivent Advisor Network, a registered investment advisor. The Content has been made available for informational and educational purposes only. The Content is not intended to be a substitute for professional investing advice. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.