When You Should Get Term Life Insurance – Episode 235

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[00:03] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler. Hello listeners and welcome to this episode of the Prosperity Podcast. Today we have an interesting topic, something that is going to be tailored a lot for the younger and mid-aged audience. So we have Kim Butler as our host. Are you here Kim? Yes, I am looking forward to the discussion. Yes. So this discussion is going to be about term insurance and we want to know when is term insurance a good option? Always. I still have it and that may be a surprise to some people because there’s so much talk about whole life insurance and how valuable it is and there’s absolute truth

[01:02] to that, of course. But the fact is most people, in fact literally every single client that I know of, don’t have the ability to buy the maximum amount of life insurance that they qualify for in whole life. I mean there’s just typically not enough cash flow to handle it. Of course there’s going to be some exceptions, but for the most part term insurance plays a very important role. The first part of it is to fulfill your human life value and that may be a new term to some. So human life value is the maximum amount of life insurance that a company or companies will let you have and it’s a function of either income or net worth. So I’m going to give some really rough rules of thumb that will enable you to

[01:56] determine human life value. But before I do that, I’ve got a fun story to share. So in the court system when people are, I said this was fun, I guess this is not very fun. I’m sorry about this. When people are killed in an accident, and I don’t mean to make light of that at all, there is a actual software that is used called PhD analytics in the courtroom to determine their human life value. So this is not the pain and suffering part that goes on in the lawsuits. This is just simply an economic calculation of the value of a human life and it may sound a little odd, but it’s something that’s done in the courtrooms all the time and they have this fairly fancy, I’ve actually seen the software, attorneys use it.

[02:49] It’s a fairly fancy way to get at a number, a dollar figure that represents somebody’s human life. Again, not the pain and suffering part, just economically speaking, what was that person worth? So in the life insurance industry, we use rules of thumb instead of the fancy software and we can absolutely quantify it numerically with calculators from something like Truth Concepts dot com, but the rule of thumb is simpler and it is this. Your income times between 15 and 30. So let’s just take somebody they’re making a hundred grand. No, this is individual, not as a family. Somebody’s making a hundred grand. Their income times 15, of course, is a million five. Their income times 30 is of course three million.

[03:37] That’s the range of human life value. And if they’re younger, then it’s going to be times 30. If they’re older, then it’s going to be times 15. And it’s a really rough rule of thumb, but it gives us a guideline. There’s another measurement of human life value that is one times your gross worth, not net worth, not assets minus liabilities, but gross worth. And I know this for a fact that somebody with a lot of debt, so like some of these real estate guys where they’re personally signing on debt all the time, you know, they may have X million dollars of gross worth and their net worth may only be one million dollars because of all the debt. But, you know, let’s just say it’s 10 million dollars of debt.

[04:23] So there you could say their gross worth was 11 million. They have one million of net worth and 10 million of debt. And so they can actually get 11 million dollars of life insurance. Well, they’re not going to do that with whole life. They’re going to do that with term insurance. And so they’re going to have a mixture. So this comment out there that you get that’s buy term and invest the difference. That’s crazy. You should be buying term and buying whole life insurance. That’s the best combination where you take your human life value. Let’s just go back to our earlier numbers. Let’s say it’s a million five and you say, okay, I’m going to get all of that. And I only have, say, 10,000 dollars a year for whole life premiums.

[05:11] Like that’s my saving capacity. So let’s say my 10,000 dollars a year enables me to buy, let’s just use easy math, 100,000 dollars of whole life insurance. That’s probably a little on the low side, but we’ll just go with that for now. Well, that means there’s still a million four of human life value that should happen. And so that million four should be filled with term insurance. It’s a very valuable, very important step to take. And I will admit I’m guilty of not introducing this concept. Sometimes people come in and they just want their whole life insurance. We provide them that and then we go on down the road. And so I’m speaking to my clients, if I’ve done that to you, then shame on me.

[06:00] You should be bugging me for term insurance. Like this is something that you can get from us. You can get it on the web. Cheap term insurance is totally fine. There are different types of term insurance, which I’ll get into in a minute. But term insurance plays a role of fulfilling human life value. Now before I go on, let me just pause. Have I made some sense there? Do you have any questions so far? You’ve made a lot of sense. And I think it’s a misconception for younger generation and mid-level people to think that term is only applicable to them. And when you started out and said that everyone needs it and you always should have term, that’s kind of a shocking statement. Yeah. Yes, it is.

[06:44] And yet I firmly believe that. Now somebody could come and say, hey, you know, I’m young, I have no debts, I have no kids, I have no real need for any insurance. And I may want full life insurance, but I certainly don’t need any term insurance. I can accept that. But there’s another job that term insurance does that we need to talk about. And that is it saves your health, not your age, your health. And what I mean by that is if you are young and healthy and you buy term life insurance and then something happens to your health and you get a disease or some problem occurs that makes it so that you would no longer qualify for life insurance, then your term insurance saves your health and it keeps the spot open, if you will, for

[07:44] assuming you have the right kind of term insurance, converting the whole life at some point in the future. And then if you don’t want to do that, it still saves your health because at least during the term of time, let’s say you bought 10 year level term, during the term of time, you would have the term insurance for coverage if whatever might occur that could go downhill fast. In other words, you know, let’s say you had a disease and you ended up dying early within that term of time, then of course that death benefit would pay. So it saves your health. And then, of course, here in a minute, we’ll get into the two types of term insurance. But again, I just want to pause and see if there’s any questions.

[08:26] No, I don’t see any questions. I’m sure that we’ll get into talking about the different types of term insurance. And then we may even talk about the different levels of term insurance, meaning we’re going to do a 10 year or a 20 year or 30 year. Let’s keep diving into this. This is interesting. OK. So the different types are basically convertible and not convertible. Or I should say convertible to whole life and then everything else. Because one of the things that happens is occasionally somebody will say that they have convertible term insurance. But the problem is the only thing it’s convertible and convert means like to switch or or convert. I mean, convert. That’s the definition to switch over into something else.

[09:10] So when we say it’s convertible the whole life, what it means is you buy the term insurance, you get the physical exam, you get approved, you pay the premium. And then at some point you raise your hand and say, hey, I’m ready to switch this to whole life. And all you do is sign one form and pay the higher premium. Because, of course, whole life has the cash value component, whereas term insurance has no cash value. So the premium is a lot less. So converting the whole life is a very good strategy when you’re ready for it cash flow wise. But there are some term insurances that are convertible only to universal life. And that’s a subject for a later day. But the bottom line is you do not want universal life.

[09:52] It’s just very, very rare that that’s truly a permanent product. If you’re going to have universal life, frankly, you’re better just having term insurance. So if you have term insurance that your agent or the company saying, oh, yes, it’s convertible. Well, convertible to what you need to make sure that the term insurance that you have, if you want to convert it, and I’ll elaborate on that in a minute, is convertible to whole life. Now it’s perfectly acceptable to have non convertible term insurance. In other words, I call it cheap term on the web. Like if a brand new client comes in and let’s say, again, their human life value is a million five, we may do a hundred thousand of whole life. We may do say a million dollars of convertible term insurance.

[10:43] And then we may do $400,000 of what I call cheap term on the web and cheap term on the web is not convertible. Like we’re going to buy it. We’re going to have it for a period of time. We’ll get into levels here in a minute, you know, 10, 20, 30 years, and then we’re going to drop it. Like that’s our intention. And that’s perfectly acceptable. I will admit that right now today I don’t have any of the cheap term on the web. I have all of my term insurance is convertible term insurance because I really intend to convert it over time. I don’t know that for sure. You know, I don’t have a crystal ball like anybody else, but I intend to convert it. So I’m going to pay a little bit more for my term insurance,

[11:26] not have cheap term, but have, I guess you could say it’s inexpensive term. And it is a little bit more, but it means I can convert to whole life. So that’s the story there. Now if you have convertible insurance term, convertible insurance, how difficult is it to switch it over to become whole? Oh, it’s a piece of cake. You literally raise your hand, sign a piece of paper, pay the higher premium and you’re done. So no physical exam, no anything. I mean, it’s a simple, simple process. And is there any fees or waiting period, or is it really that simple? It’s really that simple. The only quote fee is the premium that you’re going to pay for the whole life, which of course is now going to build cash value.

[12:12] So you’re going to need to have cash flow to continue that premium, but there’s not an extra fee. You also actually, from most companies get a credit. You get a term conversion credit that is worth one year of the premium that you’ve paid, assuming that you’ve paid it for a year. You can convert sooner than that. But if you’ve paid term insurance for a year and you, you know, maybe it was a thousand dollars or something, you actually get a thousand dollar credit toward the conversion. And if you only convert part of it, then you get a partial credit towards the conversion. Wow. That’s a lot of flexibility. And I see exactly what you mean by how it saves your health. So you don’t have to go through that physical exam that for some people,

[12:59] if a health circumstance comes up, that’s a complete and total lifesaver. Absolutely. Now, as we’re wrapping up here, let’s cover levels because that is a question that people are going to have. And so the old style term insurance was called yearly renewable and it is literally like annual term insurance. It renews on its own. Oh, Emma dog is going to add her two cents. So the yearly renewable term renews on its own and has the ability to have a lower premium because it’s literally just for one year at a time. And that’s not very common these days. It still exists. But what I see more often is 10 and 20 and 30 and maybe 40. I can’t remember if I’ve seen 40 year level. That’s pretty new. But 10 and 20 and 30 year level term are more common

[13:57] these days than the one year or the annually renewable or yearly renewable term insurance. And, you know, there’s all kinds of pros and cons to all of the above as a general rule of thumb. If you’re young and you’ve got young kids, just grab 30 year level term. Like there’s nothing wrong with that. Just understand that the cheap term on the web should probably be the 30 year level, the more convertible term. There’s no point in having it be more than about 10 years because you don’t want to pay more. So if you have a 30 year, that’s going to be more than 20 years going to be more than 10 year. Well, if your intention is to convert and say 10 years, there’s no point in paying a little bit more for 30 year level term.

[14:46] And it just doesn’t make sense. You just really want to get the conversion done in 10 years, realizing it’s a guess, but that’s your intention. We’ll go forward. Hope that we can help you make that happen through some of the other strategies that we have or through your own increase in income. So I’m going to say 10 year level, if you’re going to convert it 30 year level, if you’re not that is some great insight as to the different types of insurance. And if our listeners listen to the previous episode, they’ll understand they be focusing on cash flow and that additional cash flow will help them be ready when it’s time to convert. And in our next episode, we’re going to be talking about different types of policies and the

[15:31] advantages of buying a big policy or several small policies. Before we get to that next episode, can our listeners ask you questions or even ask us a question on the podcast? Absolutely. So we have a special email dedicated to podcast listeners. It’s hello at partners, number four prosperity.com. And sometimes I reply on emails. Sometimes I reply on the podcast, but we love questions, happy to entertain them and you will absolutely get an answer. Again, that’s hello at partners, number four prosperity.com. Thanks so much for sharing this wisdom with us today, Kim and listeners, make sure you stay tuned for the next episode as we’re going to dive a little bit deeper into policies. Thank you for listening to the prosperity podcast to take control of your

[16:23] money and have it work for you. Visit us at partners for prosperity.com. If you liked this episode, make sure you subscribe and leave a review.