Month: April 2018

 

On Episode 45 of the Your Financial Pharmacist Podcast, YFP team member Tim Church and Certified Financial Planner Tim Baker discuss some of the key features of disability insurance and walk through how to get the right coverage.

PolicyGenius

Several reputable companies offer disability insurance but it can take a lot of time and energy to get multiple quotes. YFP has partnered with Policygenius, an online independent broker to help you quickly shop multiple companies for the coverage that’s right for you. They have a very user-friendly interface and their team will help you through the entire process from application to signing a policy. You can even get an estimate without entering your personal information https://www.policygenius.com/yourfinancialpharmacist

Episode Transcript

Tim Baker: What’s up, everybody? Welcome to Episode 045 of the Your Financial Pharmacist podcast. I am taking the host seat today. And I’m joined by Tim Church, who hasn’t been on for quite a bit. Today, we’re going to be talking all about disability insurance. Last week in Episode 044, Tim Ulbrich walked down the path for him and his family, talking life insurance and term life insurance, more specifically. So this week, to kind of continue on the insurance theme, we’re bringing on Tim Church, and we’re going to talk all about disability insurance, what that picture looks like for him, how to basically price disability insurance and what that looks like, and hopefully you walk away from this episode with a little bit more confidence in the disability insurance arena. So Tim Church, welcome back to the podcast.

Tim Church: Thanks, Tim. Great to be back on as always. I thought you guys did an awesome job last week talking about life insurance. And I think that and disability insurance are probably some of the least sexiest personal finance topics, maybe just a step above taxes, but obviously, I think it’s something that’s important.

Tim Baker: Yeah, it’s funny because like when I meet with clients, you know, one of the things — and we’ve talked about this in terms of how I price working with clients, it’s about income and net worth. So you know, what I tell clients is when I give them recommendations, I’m trying to figure out, OK, what’s the best way to help them grow and protect their income and grow and protect their net worth while keeping their goals in mind. And the life insurance and the disability insurance are all about that. And it’s definitely — I know you guys talk about in the “Seven Figure Pharmacist,” it’s definitely a defensive posture because you’re basically trying to protect what you have. So it is super important, and I think it’s one of the more overlooked things that pharmacists, at least in my experience, will have in place with their financial plan. So we’re going to get into disability insurance and kind of unpack that whole issue. But before we jump into that, why don’t you tell everyone what’s been going on with you and what you’ve been up to since the last podcast?

Tim Church: Well, I’ve just been kind of hanging out here down in Florida, getting some nice weather, starting to warm up. But other than that, I’ve got three words: Student loan course. So basically, I’ve been knee-deep, trying to get everything ready for our beta group that’s going to be starting in a week or two here. And really, it’s just been a labor love and really excited to see it all come together. Looking back when we first started out the outline, I think I underestimated and think all of us did, all the moving pieces that were going to be required to get it up and running and how many Saturday morning marathon sessions that you and I would have. But basically, you know, it’s been fun. And I think it’s interesting how every time you and I talk, we somehow keep adding more and more content. But CEO Tim Ulbrich is basically putting the hammer down and saying, we’ve got to get to the finish line, which I think is a good play.

Tim Baker: Yeah, and when we had our last T3 conference kind of in Baltimore, this was one of the big points that we were working on is working through the course, and it’s always great to have you and Tim in Baltimore and working through this stuff. I think when we did that way back when, I don’t know if it was March or February or when it was, but we thought we were pretty close, and then we looked at it some more, and we’re kind of at the point where we’re shaving the ice away from this perfect statue, this ice statue. So yeah, I think for me, I just need to sit down and get my videos finalized. I feel like they’ve been there waiting to be recorded. So I’m anxious to get that done, and I think that will be done this week. But we still have some spots left for the beta group, so if you still want to get in on that, it’s 50% off, so you can go to courses.yourfinancialpharmacist.com and enter code LOANRX. So go to courses.yourfinancialpharmacist.com and enter code LOANRX, and that’s for 50% off. And what we’re really trying to get at here is is this course delivering everything that we say it will? And basically, what we believe that this course will do is for one of the major pains for pharmacists, 89% of pharmacists that graduate pharmacy school will have loans is really to provide some type of clarity with their loans in terms of inventory, what they actually owe, who they owe, inventory their feelings about the debt, and then come to a strategy that basically fits their situation and what — there’s a lot of information and sometimes misinformation out there in terms of the student loans and the forgiveness programs out there, and then really how to optimize your situation and get everything you can, either out of forgiveness or even a nonforgiveness strategy. So Tim, do you have anything else to add on student loans before we jump into disability?

Tim Church: No, I think you covered it pretty well. I mean, just excited to get it off the ground. I think it’s going to provide a lot of value to people.

Tim Baker: Yeah. So do I. OK, so let’s get into this. So I think one of the things that we probably should talk about first — and I think this is one thing that we often talk about with financial planning in general is why should we have disability insurance? So Tim, for your particular situation, you know, you look at your financial picture. What are the big reasons why you think disability insurance is important?

Tim Church: Well, I think what it comes down to simply is could I survive if I suddenly was unable to work? And whether that’s because I got in an accident or because of an illness. And at currently, basically it’s not going to happen. My wife and I are dependent on me bringing in an income right now. And she works as well, but it would be very tough, especially with still paying off her student loans and just to be able to live the lifestyle that we currently have. So I think that’s really the biggest thing when I think about disability insurance.

Tim Baker: Yeah. And I think for a lot of people, one of the things that we mentioned in the lead-up here was that for a lot of pharmacists and really, young professionals, it’s one of the things that is often overlooked. And I think part of it is is that feeling of invincibility, part of it is it just doesn’t make the cut when we talk about all the things that we have competing for our income. But it is really imperative that pharmacists have it in place. And like we say time and time again, the average pharmacist will make $9 million over the course of their career. $6 million of that will flow through their bank accounts. And you know, our listeners, Tim, you and Andrea, you guys spent a lot of money to get this degree, which affords you the ability to earn more than kind of the average American. So I think it’s best to protect that. And outside of kind of the time factor with a lot of my clients, their second biggest asset is their ability to earn. So I think a proper policy in place, whether it’s between the employer-provided or a supplemental disability policy, which we’ll get into, I think it’s imperative for this part of the equation. And just to give you guys some context, you know, life insurance is typically — I don’t want to say it’s the sexy part of insurance because I don’t know if there is a sexy part of insurance — but life insurance, typically when people think of insurance, I think, you know, and buying policies, they think of that because it’s, oh, I have a $1 million policy or a $500,000 policy. It resonates more with people. But disability, you know, disability insurance I think is as important, if not more, in the sense that you know, according to the Social Security Administration, 25% of today’s 20-year-olds will become disabled. And I think it’s for a period of at least three months before age 65. And we know that a lot of people out there don’t have the prerequisite emergency fund or things that they can do to survive that three months or even beyond. So again, it’s important to have that policy in place.

Tim Church: And I find, Tim, is that a lot of my friends and colleagues, they seem to be very underinsured in this area. And when I say that, I mean they basically either don’t have a policy or something that’s very minimal, and I think it kind of goes back to that feeling that you know, you may be young and healthy or that something really bad would have to happen, but what’s interesting is I actually personally know some pharmacists who became disabled and couldn’t work for over a year. And a couple of those were really freak accidents where they experienced some head trauma and basically, they had cognitive deficits and they weren’t able to work because of it. And I know another pharmacist, she actually had really bad rheumatoid arthritis. And that really put her in and out of work, and sometimes she was only able to work part-time. But these are actually real cases that I know of where I don’t know their situation, but essentially, they would have needed disability insurance unless they had some significant wealth already accumulated.

Tim Baker: Yeah, and it’s crazy — and I shared this story last week about a colleague working with clients that were widowed or widowered — I don’t know if that’s a word — but basically, they had life insurance in place, and thank goodness that they did because they had three young kids. But you know, this usually hits home when you know someone or you have real life experience. And it’s really not a question of if, it’s when for people to come into contact that are going to go through this type of thing. So you always think that it’s going to happen to someone else, and I think there’s a bias out there, and I should know what that bias is, but you always think it’s going to happen to someone else until it happens to you.

Tim Church: Overconfidence.

Tim Baker: Yeah, and maybe it is overconfidence. So I think it’s definitely important to kind of hear that and just take — like again, a lot of our listeners, you guys have worked so hard to get to a point where you can earn that six-figure income. And you want to protect it for the sake of your lifestyle and for your family, you want to make sure that you’re protecting that. And it really doesn’t take much in terms of effort to kind of get the protection that you need. So hopefully, this episode brings a little bit more clarity to that. And I know you guys brought it up in “Seven Figure Pharmacist” quite a bit. I think it’s hopefully something that, you know, maybe after the third or fourth time of us talking about it, it empowers our listeners to get that insurance in place.

Tim Church: Yeah, and I’m always curious as to the reasons why people don’t. And I think we talked about just that feeling of invincibility, especially if you’re young. But I think the cost also sometimes deters people. When you look at life insurance and some of the other insurance coverages, we’ll get into this, but disability insurance is a little bit more expensive than some of those. And so when you look at just the cost itself, you’re looking at that and saying, ‘Wow. Can I really afford that much extra?’ But then you have to look on the flipside is really can you afford not to have it?

Tim Baker: Yeah, and it should just be baked into your monthly budget, in a sense. And one of the things of life is that, you know, back in the day, you know, your employer used to cover it just like they covered a lot of other things, and it’s not necessarily the case anymore. So again, it’s very important to kind of take control of the situation and get the type of policy that is going to work for you. So what do you think, Tim? Do you think we should kind of break down the types of policies?

Tim Church: Yeah, let’s unpack that. I mean, one of the things that I’ve seen just in my own research and things that we got ready for “Seven Figure” is that disability insurance policies can be very complex. There’s a lot of extra features, add-ons, things like that. And I know when I applied for coverage before, it was like buying a car. You have your base model, and then there’s like 20 upgrades, features, things you can add. So Tim, can you kind of break down the two basic types of disability insurance?

Tim Baker: Yes. So the two broad types of disability insurance are going to be what’s called short-term disability and long-term disability. And I would say not to get caught up in the semantics of what short-term and what long-term is. It’s kind of a moving target for every carrier, every company out there. Essentially, what you want is a policy that covers you in the event of your disability. And we’re going to talk through some of the different aspects of that. Typically, you want a longer term disability policy in place that will last a period of years, if not until basically retirement age. But there are other policies out there that are more kind of stop gaps that a short-term policy would fill in for. So those are the two broad ones are short-term disability and long-term disability.

Tim Church: And wouldn’t you say, Tim, that when you’re looking at kind of that benefit period or the time that you would have the disability insurance coverage, it really kind of comes down as how long would you actually need those benefits in terms of you know, could you accumulate enough wealth by the age of 50, 55 and maybe not need it all the way until retirement? So you could break it down, if you wanted to, in terms of where you would expect to be retired or when you would actually need that income support. Is that a good way to look at it?

Tim Baker: Yeah, I mean, I think what I often say is that I would recommend just like we would recommend an emergency fund or life insurance policies or whatever, I’m going to recommend basically what the textbook suggests. So typically, the textbook would say, ‘Get a long-term disability policy that would last until your Medicare age,’ which would be like 65 — I think it’s 65 — until retirement. So typically, that would be where we would start with a client. And then from there, you know, you might look at that policy like, ‘Gees, Tim, that’s like really expensive. I don’t think I’m prepared for that.’ And that’s kind of when we start looking at some of these other variables that we’ll get into or these key features that we’ll get into that we can slide around to see, OK, what is more in line with your budget. But typically, the textbook would say, ‘Have a policy until retirement age.’

Tim Church: Gotcha. And then when we talk about how much coverage you actually need, when you break that down, so how do you usually walk through clients to talk about the actual needs?

Tim Baker: Yeah, so typically, you’re going to want roughly around 60% of your gross income. So that is before taxes are taken out. And typically, it’s quoted or it’s priced based on monthly amount. So if you make $10,000 per month, you’re going to want something that’s going to cover you for around $6,000. And the reason that that is is you know — and it depends on who is actually buying the insurance, whether it’s you or your employer. It depends on if your employer buys it, then the benefit comes to you taxed. If you buy it, so you’re buying a policy with after-tax dollars, the benefit comes to you as tax-free. But 60% is typically the number that you’re going to want to look at. But again, it’s the same thing with the coverage period. You might get to that point and you say, ‘Wow. 60% until I’m retired is going to cost me this much.’ And that may be where you say, ‘Well, I can probably get by with 50% or 40%,’ and it’s basically a conversation that I have with clients. Obviously, I want to push them to protect as much of their income as they can, but at the end of the day, it is a cash flow concern.

Tim Church: Yeah, and it comes down to also too what kind of lifestyle would you want to have if you become disabled? And do you need that amount? And I guess that’s probably where you can talk with your clients about determining maybe some more specific needs, client-to-client and just kind of asking, do you want to maintain your current lifestyle? Would you be OK if it was reduced a little bit?

Tim Baker: Right. Exactly. And then that’s kind of where you know, the more of the human side comes into it is if a disability event were to happen, what do you see yourself doing and that type of thing. And how do you see yourself living.

Tim Church: Yeah. So we talked about coverage amounts. So the percentage of your income that you’re actually getting a policy for, so that’s going to have a big impact on the cost of the policy. And then also how long those benefits that you would actually receive. And then the next thing that comes into play a lot is the elimination period. So basically, what’s the waiting period between the time that you put a claim in for your disability and you actually receiving benefits. And sometimes, I think that’s where it can be interesting to talk about do you need a short-term and a long-term disability policy? Or could you just have the long-term disability policy? And I guess that really comes down to is whatever that elimination period is that you choose, is do you have a good emergency fund to cover you in that gap or that window?

Tim Baker: Right. So the elimination period or the waiting period or you could think of this as like a deductible that you pay in time before your benefit gets to you should match pretty closely to what your emergency fund is. So if your emergency fund reserves is for three months, 90 days, which I think is typically best practice, especially for a dual-income earner, that’s probably where your elimination period can come out. But again, you can toggle this in a way that you can get policies that have elimination periods after 30 days or you can wait a whole year, and that basically makes the period or the premium a lot cheaper if you wait a year. But then you’ve got to ask yourself, if I become disabled, can I wait a whole year to get my benefit? And for a lot of people, it’s no, but it depends, again, on a case-by-case basis. I would say best practice is probably look at 90-day, so a three-month waiting period once you submit your claim and then price the policies from there.

Tim Church: One of the other things that typically comes up on policies for disability insurance is own occupation or gainful occupation. So can you talk a little bit about that, Tim?

Tim Baker: The big definitions — so these are basically definitions of disability. So your policy is going to have a definition. And the big ones out there are own occupation, which is basically the inability to engage in one’s own occupation, so like a pharmacist. And that’s typically the most expensive because it’s basically the most limited in terms of your ability to receive that or the most inclusive for your ability to receive that benefit. And then there’s something that’s called any occupation, typically referring to is basically if your policy is any occupation or any occ, you might hear, or own occ. Any occ is the inability to engage in any occupation. So this is if you’re a pharmacist, Tim, if you have a policy that is any occupation and you become disabled, but you can’t necessarily be a pharmacist. So maybe you have some, like you said, cognitive disability, but you can still be a greeter at WalMart, as an example, then your claim for your disability insurance would be denied because they could say based on the definition of disability, you can still hold gainful employment, but you just can’t do what you’ve been trained to do. So any occupation is one that is more liberal in terms of your durability to say whether you’re disabled or not. And to me, I would say this would be one that’s definitely kind of a nonnegotiable. I would want clients to make sure that you have an own occupation because think of all the things that you could theoretically do for work. And for you to be denied that benefit would be a tragedy, I think.

Tim Church: Yeah, and it kind of goes back to what we talked about. I mean, how many years of school and training do we go through in order to be able to generate that income? And so of course, you’ll want to protect that and that ability to make that salary.

Tim Baker: Yeah, and some of the other definitions out there that you might see would be like modified any occupation, which would basically be inability to engage in any reasonable occupation that one might be suited by education, experience and training. So that’s maybe kind of an in-betweener. And then the other one you would see is social security definition of disability, which is probably the most stringent. And they basically define that as a mental or physical impairment that prevents the worker from engaging in any substantial gainful employment. The social security definition of disability is the most stringent. So if you have a policy that follows that guideline, you’re definitely going to want something outside of that policy to cover yourself.

Tim Church: Before we continue with the rest of today’s episode, here’s a quick message from our sponsor.

Sponsor: As a pharmacist, you’re going to make millions of dollars over your working career, and you’ve worked hard to get where you are. Take a minute to answer this question: Would you be able to support yourself and your family if you were suddenly unable to work because of an accident or illness? Disability insurance provides you with money to cover your bills and expenses if you’re unable to work. Your employer may offer some coverage, but it may not be enough, and it may not follow you if you were to change jobs. That’s why it can be a good idea to have a private, long-term, disability insurance policy. We want to provide the YFP community with an easy, one-stop solution to help you get the coverage that you need. Therefore, we have partnered with PolicyGenius, America’s No. 1 independent, online insurance marketplace, so you can quickly get quotes from reputable companies rather than wasting time having to make phone calls and shop multiple websites online. You can get your estimate today by going to yourfinancialpharmacist.com/insurance. That’s yourfinancialpharmacist.com/insurance.

Tim Baker: Now back to the Your Financial Pharmacist podcast. So Tim Church, I know we’re talking lots about these different features. Why don’t we jump onto PolicyGenius — and actually, listeners, if you go to yourfinancialpharmacist.com/PolicyGenius, you can actually go through the process that I’m going to take Tim Church down. And just to kind of reiterate this, I talked about this with Tim Ulbrich in terms of the life insurance. You know, one of the reasons we like PolicyGenius is because when you get on there, you’re quickly seeing how clean their interface is. So a lot of these insurance companies that I worked with in the past, you know, their websites are difficult to navigate and just not great. And I guess I’m more of an Apple snob, so I like nice, clean interfaces. And they don’t disappoint in this regard. I think more importantly, you know, from being a fee-only guy, not really liking the commissions, their agents that you might interact with do not get paid a commission. They’re basically paid a salary, so not really incentivized you to put you in a policy that is going to be in your best interests and not yours. And then the other thing that I like is they’re more or less a broker. So they can go out to all of the best companies out there and price the insurance carriers and quote the insurance carriers from across, basically across the board. So you know, for these reasons — and I would say too is when I work with them for clients and I’m sure with our listeners, if you have a question — and the education centers there are great — but if you have a question about your policy or about the process, super eager to help and super responsive, even if you have existing policies, they’ll look at that and kind of give you some advice. So I’ve been nothing but impressed with them in terms of being a good partner for Script Financial and I know with Your Financial Pharmacist, I think they’ve taken care of some of our listeners out there, and we appreciate them and their place in the space of insurance. So Tim Church, are you ready to kind of hop on here and do this thing?

Tim Church: Yeah, let’s do this.

Tim Baker: OK. So again, you can go to yourfinancialpharmacist.com/PolicyGenius and basically, follow this. And Tim, the first page is going to basically take us to life insurance or disability insurance. So obviously, we’re going to go through disability insurance on this episode. So you are a male, what is your date of birth?

Tim Church: 08/14/1985

Tim Baker: You reside in the state of Florida.

Tim Church: The Sunshine State.

Tim Baker: Alright, so the next page is going to be talking about your occupation. So what’s your occupation, Tim? I forget.

Tim Church: Professional drug dealer.

Tim Baker: Alright, so pharmacist. You do work at least 30 hours this week in this occupation, which is unfortunate. How many years have you worked in this occupation?

Tim Church: So a little over seven.

Tim Baker: OK. And then highest level of education? So we have basically JD or MD or PhD.

Tim Church: We’ve got to get on them about that, about putting a PharmD selection, right?

Tim Baker: Yeah, I’ll write a strongly worded email. And then your individual income, so don’t income from a spouse or partner. So what’s that?

Tim Church: So base salary is about $125,000.

Tim Baker: OK, $125. And we’re going to assume no existing coverage. So let’s hit next here. OK. So basically, we’re going to be talking about selecting your monthly benefit. So the default here will default to 60%, which is basically the textbook recommendation. So if you pay the premium, which you will in this case, you’re going to get all of the benefits. So in your case, the recommended benefit or 60% is going to be $6,100 per month.

Tim Church: And that sounds pretty close to what actually my net take-home pay is. So that seems pretty reasonable or realistic of what I would need.

Tim Baker: Right. And that’s kind of the idea is to match that. Now, you know, listeners can’t see this, but on the page, basically it says for a 42-year-old male living in Florida, the monthly range, so this is kind of the first place where you’ll see kind of a quote, so that is $111-151. And the plan features, it says existing coverage of $0, benefit amount of $6,100, a waiting period of 90-days and the benefit period up to age 65. And then this is own occupation, residual disability coverage, which we’ll talk about, and then non-cancellable feature, which we’ll talk about. So this is kind of like the first page where you see more or less, it gives you an idea of where we’re going. So it asks the question, do you expect your income to increase significantly over the course of your career?

Tim Church: I hope so.

Tim Baker: So we’ll put yes. And the reason that we do this — and this is a good point maybe to discuss briefly about employer-provided disability insurance and then basically individually owned disability insurance, which is what we’re doing now. So if you were to answer yes to this question, basically they’ll run quotes with a future increase option, which allows you to increase your benefit amount when your income increases, regardless of any changes in your health status. So the example here is if Tim knows that “Seven Figure Pharmacist” is going to continue to sell, and you’re going to sell it to every pharmacy school out there, whatever the case is, and you’re making a lot of money, you want to make sure that your benefit matches kind of the income that you’re pulling in. So that option gives you the ability to buy more. Secondarily, if you have an employer-provided benefit, they’re going to pay you some type of benefit, which is going to be taxed because they pay the benefit of the premiums, but if you were to leave that job, and you go to another pharmacy job that doesn’t provide disability insurance, then the policy that we’re buying now will give you the option to basically buy more or a future increase option to kind of make up the gap. So basically, that supplemental policy that you would buy now becomes your main, your primary policy and will make up the gap in terms of what you need. So hopefully that makes sense to our listeners out there. So now we’re going to talk about the waiting period. So this is basically that time deductible. And this particular tool will default to 90 days. So policies have waiting period of anywhere from 60-365 days. So if it’s a 60-day waiting period, then that’s typically a higher premium because you’re getting your benefit quicker. If it’s 365 days, you’ll get your benefit a year out. And that’s typically makes the policy a lot more affordable. So Tim, what would you like in terms of your waiting period?

Tim Church: Given I have a pretty decent emergency fund, let’s go put that at 180 days.

Tim Baker: OK, so you’re going to move it out a little bit. OK, so then the benefit period, so basically this is how long the policy will pay you if you become disabled. So policies typically have benefit period of two, five, 10 or up to retirement age, which could be 65 or 67 for a lot of our listeners. Obviously, the longer the period, the higher the cost of the benefit. So what would be a good age for you, Tim?

Tim Church: So I think the default of 65, that’s a good place to start.

Tim Baker: OK, I agree. OK. So then this next page is basically wrapping it up. So it does include own occupation, so this is your occupation. It also asks you about a residual disability. So basically, these are riders or clauses in the disability, and what the residual disability asking you is basically saying, do you want to be paid for partial disabilities that could potentially cause loss of income but doesn’t necessarily prevent you from working completely. So typically, the default here is to say yes. And then the final question is do you want it to be non-cancellable, which basically means as long as you pay the premiums, the insurer can’t cancel the policy or change the premiums or change the benefits. So you basically lock into all aspects of your policy. So typically, you want that as a yes as well. So is that good, Tim?

Tim Church: Yeah, that sounds good. And I was wondering, Tim, if this is a good point to talk about that if you have coverage through your employer only, and let’s say you switch jobs and your new employer doesn’t cover that and you have to get your own policy, you’re probably going to also have a health evaluation. And if you’re not as healthy as you were when you had the previous policy, this could really have a huge impact on cost and your ability to even afford a policy like that. And so even like life insurance, this may be a point where it’s good to even have something outside of your employer, just so you can avoid having the reevaluation.

Tim Baker: Yeah, it’s a great point. So that particular rider, I think if you know that potentially could happen to you or you suspect that could happen to you, I think it’s good to have that in there, so that’s another great point. And actually, Tim, the next part of this just basically asks you some basic health details. So unfortunately for these policies, pre-existing conditions are not covered. So if you have something that could potentially disqualify you, you know, as an example, if you have arthritis and then you submit a claim for arthritis, that won’t be paid by the insurer. So that’s something to be aware of. So the next question, Tim, is going to basically ask you about some conditions like asthma and sleep apnea. I know you’re a healthy guy, so instead of kind of listing all these out, we’ll just skip through those. Is that cool?

Tim Church: Sounds good.

Tim Baker: OK. So now we basically get to the end here, and your quote for long-term disability coverage is going to basically be $115 and $155. You’ll receive a benefit of $6,100 a month up to age 65 after a waiting period of 180 days. And then, and this page, you basically can toggle your all those things that I just listed out, so if you say, ‘Hey, I can get by with $5,000,’ or ‘I want my waiting period to be 90 days,’ it’ll adjust that period. But from there, you basically will go out and put in kind of your name and your email and some contact information to go get actual rates from, you know, insurance carriers like MassMutual or Guardian or some of the other ones that are out there. The tool is great in terms of giving you an idea of where you’re at to get rate proposals and actually receive those and then move forward on your policy. So Tim, does that give you a sense of kind of the process forward for disability insurance?

Tim Church: It sure does. And I think one of the things to mention here, Tim, is that if you use PolicyGenius to get life insurance, you can actually get quotes from individual companies. But for disability insurance, it’s a little bit different because you’re going to get a range of what it could cost you. And basically, PolicyGenius looks and they partner with some of these companies, and they’re trying to find you the best deal. And that’s something that one of their agents will actually provide to you.

Tim Baker: Yeah, and basically, they explain that on the website of why is it a range instead of an actual price. And they’re going to look at all the different riders and things like residual disability and own occupation, and the proposals will try to get that back to you in terms of what the policy offers. So it’s a good point. You know, one thing that I do want to circle back on before closing up here for the day — one thing I do want to circle back on is you know, a lot of pharmacists out there do have disability policies, and you know, how does this all play into, you know, buying your own? So I would say in general, you typically, if you do have a long-term and a short-term care disability policy through your employer, I view that as a benefit. OK, so Tim Church, your quote comes out to between $115-155. Is that more or less what you expected when we started going through this process?

Tim Church: Yeah, I mean, that’s essentially pretty close to what I’m actually paying for my policy now. That gets me almost the exact same benefits, up to 60% of my income. So that’s pretty — at first, I will say, after I’ve gone through the process, it’s not very shocking. But initially, it was because it’s significantly more than life insurance that I pay for and some of my other insurances. So it’s definitely a lot more expensive than some of the other things out there.

Tim Baker: So I think another for listeners to be aware of is a lot of your employers will provide disability insurance. And typically, short-term disability insurance is you know, it’s kind of icing on the cake. Typically, we don’t advise clients to go out and buy a short-term disability policy. We’ll basically say, you know, to make sure you have a good emergency fund. From a long-term disability policy, if you do have long-term disability through your employer, know that the benefit is probably not going to be enough to kind of cover your needs. You know, also understand that it probably makes sense to buy a supplemental policy to your employer policy, so a supplemental insurance policy that’ll be maybe a reduced benefit or basically to give you some additional coverage in case you do leave your job or you want to have that future purchase option in there. But again, the reason that you get a supplemental policy is the benefit might be too small, the benefit period may be too short, or it’s not the right definition — so like any occupation versus own occupation, and you want to make sure you have own occupation in place. And again, you could lose your disability insurance if you switch jobs. So if you have the disability insurance in place that has that future options, that supplemental policy that you bought to kind of cover down on some of those shortages would then become your primary insurance policy, disability policy. So it makes sense to have that in place. So Tim Church, I think we explored disability fairly in-depth. I’m glad we were able to go through the PolicyGenius quote process to kind of give an idea of what that looks like for you. So thank for coming on the podcast, and hopefully our listeners get something out of this and at least get the wheels turning in terms of what they need from, you know, their ability to protect their income.

Tim Church: Definitely. Thanks, Tim. I think it’s so important and just, like I said, like we’ve been talking about, that you worked so hard to get to where you are and also you’ve got to think about yourself and your family and who’s dependent on that income just like life insurance. So at the end of the day, it can really make you feel pretty good to have that protection in place.

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On Episode 44 of the Your Financial Pharmacist Podcast, Certified Financial Planner and YFP team member Tim Baker interviews YFP Founder Tim Ulbrich to evaluate his life insurance needs and whether or not his current coverage is adequate. To learn more about whether or not you need life insurance, the pros/cons of different types of life insurance policies, how to determine how much coverage you need and where to go to get a quote from a reputable independent broker, click here.

PolicyGenius

Several reputable companies offer life insurance but it can take a lot of time and energy to get multiple quotes. YFP has partnered with Policygenius, an online independent broker to help you quickly shop multiple companies for the coverage that’s right for you. They have a very user-friendly interface and their team will help you through the entire process from application to signing a policy. You can even get an estimate without entering your personal information here.

Mentioned on the Show

1. YFP Life Insurance Resource Page
2. PolicyGenius
3. YFP Episode 010 – Is Whole Life Insurance a Good Investment Strategy for College Savings?
4. YFP Episode 032 – Finding Your Why (Part 1) – 3 Life Planning Questions
5. YFP Episode 033 – Finding Your Why (Part 2) – The Path to Success

Episode Transcript

Tim Ulbrich: Hey, what’s up, everybody? Welcome to Episode 044 of the Your Financial Pharmacist podcast, excited to be alongside Tim Baker where he’s going to be interviewing me to determine my life insurance needs. And if you’re thinking, what do I need? What are my life insurance needs? What should I be looking at? You can head over to yourfinancialpharmacist.com/life-insurance. We’ve got a whole educational page built out that we’re going to draw from that information and this podcast, but no need to be taking notes. You can head on over to that page and get all the information that you need to determine your own life insurance needs. Just as a preview to next week, Tim Baker’s going to be interviewing Tim Church in a similar format regarding disability insurance. So this week, we’re going to cover life insurance. Next week, we’re going to cover disability insurance. So I’m excited to do this two-part episode around insurance needs. So Tim Baker, are we ready to do this?

Tim Baker: Let’s do it.

Tim Ulbrich: So I’m actually excited. This is actually on the punch list for Jess and I to do, and I think it’s well known right now by the listenership that you are the financial planner for Jess and I, and we’re working down our list of things. In Episodes 032 and 033, you interviewed Jess and I all about finding our why, and we did a live recording of what you normally would do with a client. And we’re going to do that same thing here. One of the questions I asked you at the very beginning of us working together is, hey, I’m not sure I’ve got enough life insurance coverage. I really didn’t make this decision intentionally, and I need your help and guidance to help me figure out what we might need in addition to the coverage. So we’re going to a sneak peek live conversation, and whatever I learn here, we’re actually going to be taking back and implementing as part of my life insurance plan.

Tim Baker: Yeah, and I would say Tim, you’re probably ahead of the curve when it comes to most because when I bring up life insurance to clients, it’s one of those things where it’s like, eh, I don’t really want it. And it’s one of those things that you don’t really like to talk about your premature death or disability in terms of what we’re going to go through next week with Tim Church. But you know, it’s kind of in along the lines of estate planning. We’ve talked about that a little bit when we talked about legacy folder and having proper wills and power of attorneys. It’s just one of those things that’s just not that sexy compared to maybe investment and some of the other things. So you know, I think kudos to you in terms of having some coverage in place. And for a lot of people, it’s kind of on the back burner. And it really shouldn’t be, and I’ll preface this with — not to be doom and gloom, but I have a planner that I work with in my study group who recently lost a client. She was 38, had breast cancer, three kids, so fortunately for me, that hasn’t really happened to any of my clients, but it’s not really a question of if, it’s a question of when. It’s just one of those things, and I think me working with clients, it’s important to have a lot of these policies and documents in place because you don’t know what will happen. And the thing that you think will happen to someone else could very well happen to you. And not to be Debbie Downer, but I just think it’s important to get this on the radar of a lot of people to at least start to think about it and get that protection in place.

Tim Ulbrich: Yeah, absolutely. And we’re going to do a sneak peek into the Ulbrich household here, and I’m going to try to be as honest and vulnerable as possible. And I’ll share here in a little bit that you know, there was a period where I didn’t have coverage, and I needed it. So there’s really three things we want the listeners to walk away with today is to answer these three questions. One, do you need life insurance? We’ll talk about who does and who does not need it. Number two, you know, how much coverage do you need? And how do you determine that? And then ultimately, where can you go to begin purchasing a policy if needed from a reputable company that’s going to get you what you need? So ultimately, the question that we have here in front us is knowing I have some life insurance policy and protection in place, do I need additional coverage? And ultimately, how do we get into that number? But Tim Baker, before we do that, and before we jump in there, let’s just set the stage for what we’re talking about in terms of life insurance and knowing that some may be familiar with the different types of life insurance, what’s out there and ultimately, we’re going to be operating under the assumption of shopping for term life insurance. But just talk us through briefly the different types of life insurance that will set the stage.

Tim Baker: Yeah, so typically, the two types of — so just to talk about I guess life insurance as a whole. You typically have two broad types. You have what’s called term, which covers you for a period of time or a term, usually 10, 20, 30, 35 years. And it doesn’t cover your whole life, which is the comparison or the other type of policy that’s out there is the whole life policy. So the whole life policy basically is in force throughout your entire life, and it’s more of a robust type of insurance. So the term policy is usually the simplest and most affordable, and it’s probably best for probably 80-90% of people out there. It’s a straightforward, easy to understand, and it’s basically stripped down so, you know, it’s pure insurance. So there’s no savings component or maintenance fees or anything like that. And you essentially pay a monthly or annual premium, so that’s basically the cost to keep the policy in force over the course of that 10-year or that 30-year term or whatever that may be. And then if you die during that term, the person that you name as beneficiary will receive that death benefit. So if I have a 10-year term that covers me ‘til 2028, and I die, then the person that I name as beneficiary will get that million dollars or that half a million dollars. And then at the end of the term, the policy expires. So basically, nothing happens. The 10-year goes away, and in 2029, I’m not covered. And then to kind of compare that with the whole life policy is that you basically pay that premium, and part of that premium is paid for premium pays for the policy, the life insurance part of it, and then the other part of it goes into cash value, which is kind of a savings component. So it’s kind of a mix between an investment or a savings type vehicle and then insurance itself. It’s a little bit different, it’s a little bit more complicated, a little bit more sophisticated of a product. And I think for the majority of our listeners, Tim and I included, the term type of policy is where you’re going to want to be.

Tim Ulbrich: Yeah, and we encourage you, head on back to Episode 010, which was the first Ask Tim & Tim question that we did around whole life insurance. And the question was actually around whether or not it’s a good investment strategy for college savings, but we use that episode to really break down the difference between term and whole life. And as Tim mentioned, and I would agree, for most of our listeners, we think term is the play. And for the whole life lovers that are out there, again, we said most, not all, so there’s some exceptions to that rule. But knowing our audience, a lot of people are in student loan debt, a lot of people have competing priorities, a lot of people may or may not actually be taking advantage of the other investment vehicles that they have in front of them and retirement plans and so forth, so we think for most listening in terms of playing, we’re going to use that as the assumption throughout the rest of the episode when we talk about my personal situation, what are some of the needs that you can ultimately use that as an example to compare and think about what your life insurance needs should be. So Tim Baker, I’m in the client seat, and we’re trying to sit down and figure out exactly how much life insurance policy I may need. So what do you want to know to get started?

 

Tim Baker: Yeah, so typically what I do in this scenario, just kind of to back up a little bit is clients will get an insurance/benefits presentation. So it goes through, and it kind of educates what the purpose of insurance is in general, and then kind of breaks down the differences between life insurance, disability, health, homeowners, renters, liability, auto, so we kind of do a nice broad picture of all the different types of insurance that you need. And typically, the big one, most of the attention will go towards the life insurance and then the disability insurance. Health insurance is a big one, usually in the fall with open enrollment, but that’s typically where we’ll kind of begin in terms of assessing current policies and then basically filling in the gaps with some additional individually owned policy, which is what we’re going to do today. So typically, Tim, what I would do with you is after going through the kind of the presentation, based on your current situation with life insurance, this is where you’re at. And this is probably where you need to be. And we kind of will sit down and talk through that calculation. So typically what I would do is I would just kind of reaffirm income and current protection. So I would say for you, Tim, your current income right now is $135, correct?

Tim Ulbrich: Yes, thereabouts. Yep.

Tim Baker: And then your current policy that you individually own, that you purchased, is about — the death benefit is $1 million, correct?

Tim Ulbrich: Yeah, so $1 million death, $1 million, 20-year term policy. I purchased that back in I want to say 2014. I should know that off the top of my head, but I don’t. The reason that I remember that date, actually, is because there was a point in time where Jess was at home, not working, and I know for sure we had my oldest, Sam. We may have also had my middle, Everett, and we had no term life insurance policy in place. So you know, I guess looking back at that now, that seems pretty high-risk. And one of the things I think we want the listeners to think about is you know, do I need a life insurance policy in place? And usually the two things I’m thinking about are does somebody depend upon your income? And might you have any student loans that would not be forgiven in the event of your death?

Tim Baker: Right.

Tim Ulbrich: And thankfully, that one we did not because they were all federal loans that would have been covered, but the answer to that first question was yes, absolutely. And I had no protection in place, essentially meaning if I would have passed away in that time period, you know, that would have been obviously a significant financial hardship on Jess, either forcing her back to work, we didn’t have a great emergency fund, so I think at that point, using this just as a learning moment for the listeners really to ask themselves those questions. And as we’ll dive in here in a minute, the cost of that coverage is not very expensive for what it ultimately provides for us. So to answer your question, yeah, million dollar policy, 20-year term, and we’re about 3-4 years into that term.

Tim Baker: OK. And then you are currently covered through NeoMed. What is it, 2x your base up to $100,000?

Tim Ulbrich: Yeah, so we have employer-sponsored coverage here that’s 2x salary, up to a max of $100,000. Yes.

Tim Baker: OK. So essentially, basically what we’ve gathered so far is that if you were to die today, you would have a policy or a benefit that would go to Jess of $1.1 million. So essentially, I think what we would say is we kind of set that to the side and put that number in the parking lot, and then kind of do a deeper dive into what your overall number would be. But I would say just as kind of an aside, you know, a lot of people will look at what is provided by their employer. It’s typically 1 or 2x, and you can buy — I’ve seen it where you can buy up to $1 million in coverage. But I would say, you know, as a general rule of thumb, to look at these employer-sponsored programs, these group life insurance programs, as really a perk and not necessarily a robust life insurance plan. So typically, Tim, your NeoMed policy isn’t portable. So if you ever were to leave NEOMED, you can’t take that $100,000 with you. The stats show that the average employee will leave their job within five years. So if you were to leave, if we were to assume that you’re five years older, you’re looking for additional coverage outside of your group policy, so you’re going to pay a little bit more money. Important things to kind of be aware of when you’re factoring your employer policy into your overall life insurance calculation. So from here, Tim, I would basically kind of go through and say, ‘Hey, these are the main ways that we can kind of come to your insurance calculation.’ So it can be as simple as the general rule of thumb is 10-12x your income. So in your case, if you’re making $135, that tells me that you should have a policy between $1.35 million and $1.62 million for using 12x income. So that typically is a very fast, easy and simple way. And typically, that’s pretty close to what I see with a lot of clients. Now with your case, with Jess being home full-time, the exercise of actually going through and calculating this either using a human life value method or a financial needs analysis method, which is two different methods that I use with clients, it’s probably worth doing. So why don’t we go through and I’ll ask you a few questions about the financial needs analysis and see if we can basically come to a number here and see where you land and see what your gap is. Sound fair?

Tim Ulbrich: Yeah, that’s actually good because I don’t think I shared this, but when I bought that policy three or four years ago, I literally put my finger up in the wind and said, ‘$1 million.’ I knew the general rule of thumb of 10-12x, I’ve heard 8-12x whatever, but I really had no rhyme or reason. And I didn’t even have much thought behind, well, is it 20-year? Is it 30-year? And I think that was why ultimately, I posed the question for Jess and I to you to say, ‘OK, here we are now, three kids, different life situation. Is there enough coverage here or not?’ So yeah, let’s walk through that.

Tim Baker: Before we continue with the rest of today’s episode, here’s a quick message from our sponsor.

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Tim Baker: Now back to the Your Financial Pharmacist podcast. And I would say to back up, one of the questions like do you need life insurance? Typically, the question is, does someone other than yourself depend on your income? Do you have dependents? That type of question is, yes, absolutely. The other one you said is, are there any debts that won’t be forgiven in the event of your death? So for a lot of people, it’s going to be your mortgage and then in some situations, if you do a private student loan refinance — a lot of the pharmacists out there that are going through this — if you’re not forgiven upon death and disability, then having disability and life insurance, the covered amount on that is going to be hugely, hugely important. So Tim, basically the financial needs analysis method — to nerd out a little bit — basically what this does is it examines all of your recurring expenses to dependent survivors and basically any unusual expenses that may result from your death. So things to consider would be marital status, role of spouses meaning who is basically working, who isn’t, the size of your family, and then basically your dependents’ or your spouse’s willingness and ability to work after you would die prematurely. So in this case, basically I look at mainly six variables here. So the first one being final expense. So I’ve seen a lot of different numbers out there in terms of if you were to die, what it would cost for someone to be buried, whether it’s $10,000, $25, $35, $50,000. So Tim, do you have an idea of what it would take in terms of funeral costs and those types of things?

Tim Ulbrich: I don’t. And you know, I think this is a good point of discussion. And as we are going to revisit some of the end-of-life stuff, you know, Jess and I have talked about means of being buried versus cremation, etc. I guess the question for me is what would it cost to be cremated and ashes spread over the Buffalo Bills stadium — no, I’m just kidding. But no, to answer your question, we haven’t. Is there a general ballpark that you use to…

Tim Baker: Yeah, I mean, Tim, the ballpark that I typically use is about $25,000. I mean, obviously, you can go a lot cheaper than that or a lot more expensive. But typically, if I look at clients and I ask the question, most of them look at me like I have three heads because it’s not something that we think about unless they maybe had a parent that died recently. So I typically would just pencil in $25,000 into that basically that space.

Tim Ulbrich: Let’s do that. Yeah.

Tim Baker: Now the second one is basically a readjustment period. So typically, the rule of thumb is a two-year readjustment period, which would be basically for Jess to basically say, ‘OK. What the heck just happened? How can I basically find a little bit of continuity for the boys and just figure things out?’ And that’s typically 1.5x salary. So this is typically what we’re going to do here is have a conversation of what is your wish, what is your thought process if you were to die, would this be something that Jess would go back into the workforce? Or would you want her to stay home? Or what does that look like?

Tim Ulbrich: Yeah, we actually had this discussion, which makes for a really somber Friday night at home. But yeah, we’ve talked through this. So she’s staying at home with the boys right now, we’re doing homeschooling with our three boys, and we’d want to continue that for the foreseeable future. So I think our thought would be to establish this coverage need with the assumption that she would not go back to work. And ideally, really, be able to do it in a way that she would never have to. But certainly, we could look at the numbers and readjust that. So would that change, then, that time period? So you mentioned a two-year adjustment. Is that under the assumption that somebody is going to go back to work after a certain time period?

Tim Baker: Yeah, I think so. I mean, that’s typically what it was for. And sometimes, it might be for additional training, it might just be trying to figure out daycare or other childcare needs. But it’s basically a buffer for life to kind of resume some type of normalcy.

Tim Ulbrich: OK.

Tim Baker: So if we assume just for the practical exercise of this that 1.5x salary, we’ll call it $202,500, we’ll pencil that in because at the end here, we’re going to talk about kind of a lifetime income and what that would look like for Jess. The second part here, the third number here, is basically dependency incomes. So what are the household and childcare needs? So for this, if Jess is not going back to work, then this would really be $0 or close to $0 unless there would be things like babysitter or you know, maybe — I know she’s doing homeschool, maybe the kind of like “after-school” type needs where summer camps and that type of thing. So again, there’s a little bit of play here in terms of what you actually should put here and plan for. So if you were to look at this number in terms of the dependency period of income, knowing that Sam is 6, Everett is 5, and Levi is 3?

Tim Ulbrich: He’s 3, yep. He just turned 3.

Tim Baker: Knowing that where they’re at in terms of their schooling and all that, what would you assume is a good number for household and childcare needs?

Tim Ulbrich: So let me talk this out loud because I’m not sure I know off the top of my head. My current thought would be basically, as you mentioned, childcare needs would be I would assume $0 because she would be at home. Obviously, there could be some buffer there, but then that presents an income need, so replacing my current income, obviously. So what we know to be true is about of the income, about $5,000 of that would be true expenses per month. And my thought would be is that income would run up until the point that she could draw from retirement savings, which would be 59.5. So I don’t know if I’m answering your question, but that’s kind of the way that I’ve thought about it is that she would basically need that income with the assumption of no childcare expenses, but income for day-to-day expenses outside of childcare all the way up until the point of when retirement funds could be drawn.

Tim Baker: Yeah, absolutely. So it’s basically we’re trying to figure out how to slice it. So obviously, the big questions here are going to be, what is the household and childcare needs with Jess basically not working? And then what is the lifetime income pre-retirement? And we could also look at it post-retirement. If we assume for dependency period of income with the boys with Jess being home, I’m going to just do round numbers here in terms of what you may need. So I’m going to put $50,000 just over the course of the boys being home until they’re 18. Another, an easier number here — and then we’ll shift back to the lifetime income — is what is your outstanding mortgage liability?
Tim Ulbrich: Yeah, so our outstanding mortgage is $140.

Tim Baker: OK. And then, I know you and Jess are very interested in making sure that the boys have funds set aside for education, basically an education fund. Would that be something that you would want to bake into the retirement — or not the retirement, the insurance calculation?

Tim Ulbrich: Yeah, we’re kind of earmarking — actually, another thing I think maybe we should do an episode on that too once we get to that point — we’ve estimated at currently our goal is to shoot for about $100,000 per kid, so $300,000 total for college.

Tim Baker: And then really the big one here is looking at your lifetime income and basically trying to replace that. So if we assume very roughly that you’re going to be working for another 30 years, and then we multiply that by 5, and again, this is not assuming inflation or anything like that, that’s basically $4 million. 30 years times $135,000 is $4 million. So the idea here is basically to provide a lifetime income for both pre-retirement and retirement and try to figure out what that best number is best suited at.

Tim Ulbrich: Now let me ask you a question on that real quick. So I’m thinking that you know, knowing the life insurance benefit would be tax-free — so if I had a $2 million policy, for example, and I were to die, Jess would get $2 million tax-free versus obviously, my current income is taxable. So how you do reconcile those differences? Do you look at them as a wash knowing that you’re not accounting for inflation? Or how do you…

Tim Baker: I think typically, what I would do is I would take that number and just basically do a time-value-money calculation. So basically, say, ‘OK. If we were to get $1 million and presently and invest that over a period of time, would that provide her the $135,000 per year that she would need in recourse?’ So basically at the end of that 30-year period, that amount of the insurance calculation would be basically exhausted. So for simplicity’s sake, Tim, I’m just going to put $1 million in there.

Tim Ulbrich: So just to talk through that a little bit more, I think if I’m understanding you correctly, you’re basically saying that the listeners need to account for that that $1 million, a portion of it you would invest because you’re not going to spend it right away? And that some of that would be growing over the term.

Tim Baker: Exactly. Exactly. So that basically makes up the gap between the $1 million and the $4 million. And obviously, listeners are probably thinking, this is really, really rough math. And it is. So typically, when we break this down, we’re going to go through each of these line items and kind of make sure we have a clear, not just math, a clear number of what this looks like. So when we basically account for, you know, a $25,000 final expense, $202,500 in a two-year readjustment period, which is debatable if we need that depending on lifetime income, if we also say another $50,000 for dependency — so this would be for household and childcare needs, so I’m thinking like summer camps and things like that, babysitting, outside mortgage liability —

Tim Ulbrich: Is that per year, or one time were you thinking with that?

Tim Baker: I’m just doing a one-time lump sum.

Tim Ulbrich: Yep. Got it. Ok.

Tim Baker: So obviously, if you have a spouse that is working more, that number would be close, probably closer to the $1 million, and the lifetime income would be probably a little bit less.

Tim Ulbrich: So we’re switching that here.

Tim Baker: Right. And then you have the outstanding mortgage liability of $140,000, the education fund at $300,000 and then lifetime income, we’re saying approximately $1 million. That puts your financial needs analysis amount at $1.7 million, essentially, which is pretty close because I typically will tell pharmacists that they need probably right around that $1.5 to $2 million on the high end of things. So you’re right in there. Now, if we can do it really quickly, this is a lot faster of an analysis is basically the human life value. So basically, it takes your annual earnings, it discounts your own consumption and taxes and things like that. So if we look at your annual earnings at $135,000, do you know your effective tax rate, Tim? I know we just filed taxes. Is it like 20-25%?

Tim Ulbrich: So no, when it’s all said and done, it’s at 15.

Tim Baker: That’s really good.

Tim Ulbrich: Yeah, going down to 10 next year, by the way. I’m excited about that.

Tim Baker: Yeah. So your annual taxes are $20,250. Personal consumption rate, I’m going to estimate is basically this is — we’re going to assume that the cost of your monthly expenses are going to go down 10%, basically, essentially if you aren’t there. So that discounts it to another $11,475. So your Family Share of Earning, it’s called the FSE is $103,275. So if we assume that you’re going to work until 65, what’s your current age?

Tim Ulbrich: 34.

Tim Baker: So that means you have a work life expectancy of 31 years. If we assume a 3% increase in expectation salary, that basically means that you have a future value need of $5.1 million. If we discount that back to present value, and we assume an inflation rate of 3%, that basically says that you need a policy of $2 million.

Tim Ulbrich: So those are all pretty close. I mean, you did the general rule of thumb, that was $1.35-$1.6ish, then we got close to $1.7 in the second example where we went through the individual expenses. And then you got up to $2, so somewhere between $1.5 and $2 approximately.

Tim Baker: Yeah. And obviously, I don’t want — I really don’t want listeners to kind of get into the weeds, and it’s hard to kind of pick this over radio or over just audio. But the first analysis, you can really slice it thin and probably in your case, it’s worth going through that, but essentially, if you’re looking at, ‘Hey, I need insurance. And I’m not working with me, Tim Baker or a financial advisor,’ just say, ‘I make $125,000. Multiple that by we’ll say 10. Boom, $1.25 million.’ And then call it a day. So I don’t want people to get overly paralysis by analysis. Just keep it simple and then if we have to revisit or if you go back to it, you can always buy another half a million dollar policy or whatever that is. But I would say do what you did, and put your thumb in the air and say, ‘OK, I probably need about $1 million.’ And then we can always — what we’re going to do probably in the next stage here is go and use a company like PolicyGenius and start quoting what your gap is. So if we assume, Tim, that you need another $900,000, if we assume $1.1, then we’ll go to PolicyGenius and basically get a quote and fill the gap of where you’re lacking in terms of your life insurance.

Tim Ulbrich: Yeah, I really agree with your thought process because I think it’s so easy — and I almost felt, even just some of that paralysis of, you know, you kind of open up, you do a Google search, you start getting policies, and I was trying to keep it pretty simple, and I started a 20-year, $1 million policy. And even that can feel just overwhelming of where do I start? Am I getting ripped off? Am I not? What’s a good policy? And I think that paralysis by analysis is real. So if you’re listening, and you’ve determined, yes, somebody depends upon my income or we need to have a debt that’s taken care of in the event of my death, I would agree. Stick your hand in the water, get started, and then I think there is some value, depending on how detailed you want to get, to really going down and answering the question, What am I actually trying to do with this policy in the event of my death? And I know for Jess and I, I think there’s some peace of mind to know that you and I and with her are going to go back and actually dig into each one of these categories and come up with a final number so that we know in the event of my death, here’s exactly what we’re planning to do with that money. And I think that goes back to maybe even just a little bit of what’s your financial personality? And how much of this detail do you need or not need or does a spouse need or not need? To know whether or not you really need to get in the weeds of this. So Tim, if we determine — again, we’ll go back with specifics obviously with Jess and I — but let’s assume that we need another $900,000. Talk me through, then, the strategy of getting a quote, finding a policy. And you mentioned PolicyGenius, which is a broker, an independent broker that we really like. And the reason I’m curious about that is because the mistake I made back in buying that initial policy is I started doing a Google search, and I started entering all my information, and sure enough, within 24 hours, I’m getting all these phone calls, and I’m not sure about what’s good, what’s not good. What is the advantage of an independent broker of a company like a PolicyGenius?

Tim Baker: Yeah, so I like PolicyGenius because they kind of understand the fee-only model, for one thing. So back before I started Script Financial, I could actually sell life and health insurance, believe it or not. So I could go through the same exercise that we just went through, Tim, and say, ‘OK, we need $900,000. Let me go out and get a quote for you and basically help you write the policy,’ and then I would get a commission on basically on that policy. And obviously, term life insurance, he pays you one level of commission. And whole life pays you a little bit better. So the life insurance agents out there are incentivized to put you in a whole life policy, which is one of the problems. But essentially, what PolicyGenius does is that their agents basically work on salary, so the commissions that the policy yields goes to PolicyGenius, the entity and not necessarily the people that you are talking to. So I like that because they’re not incentivized really individually to put you in a policy that is not in your best interest. I also like it because the website is really clean and easy to use and basically because they can go out as a broker, they can go out into the market and find the best policies and the best rates instead of just using one carrier where you’re not going to get a whole lot of choice and a whole lot of basically comparison to other what’s out there. You can go to yourfinancialpharmacist.com/insurance and it’ll direct you right to PolicyGenius. And within a few minutes, you can go and generate quotes that won’t trigger a lot of those emails, Tim, that you received and kind of gives you an idea of where your quote’s going to come in at. So just kind of to give you a general rule of thumb, the average — for a 30-year-old that’s purchasing a $500,000 term policy, on average, they’re going to pay about $30 a month. So that’s pretty affordable, compared to what we spend our money on. So you know, if you’re looking at that $1.5 million policy, you know, that’s under $100 bucks that you’re going to be covered for. So just kind of give you a litmus test of where you’re at. Now, if you are a whole life believer, you’re going to pay probably 4x that.

Tim Ulbrich: If not more.

Tim Baker: If not more for that whole life policy. And that’s not to say that the whole life policy is bad, but again, I think it is kind of a forced savings, and that savings can be pretty conservative. And it allows — what it sometimes does is it will drive down the amount of insurance. So Tim, if I quote you a $900,000 whole life policy, you might look at that premium that you have to pay, and say, ‘Man, maybe I only get $250,000 policy,’ and that really is deficient in terms of what you actually need. So like I said, we like PolicyGenius. I work with them for clients because they’re super knowledgeable, so I have some clients that will come in the door with a lot of crappy policies that we need to examine and potentially replace. So they’re super helpful and very knowledgeable of the space and they take care of my clients, and I know they’ll take care of YFP listeners as well.

Tim Ulbrich: So again, that’s yourfinancialpharmacist.com/insurance. That will take you right to the PolicyGenius page that we’ve partnered with. So just as a point of reference, you mentioned some dollars there. When I bought the 20-year, $1 million term policy, it’s $38 a month. So essentially, I’m paying $38 a month for 20 years to get that protection. That’s really the definition of the 20-year term policy, which brings up the question — and one piece I want to wrap up on here is talk us through, just for a minute, the different variables that go into play when it comes to the price of that policy. So obviously, we’ve alluded to one in terms of age. And you mentioned earlier that as somebody gets older, obviously the likelihood of death becomes greater, so the policy becomes more expensive. What other factors go into play in terms of policies so people can think about where they might land in terms of their cost of coverage?

Tim Baker: Yeah, so definitely age and health history. So your sex, usually I think females are a little bit more expensive because they’ll live longer. Smoking status, so if you use tobacco or smokeless tobacco. Your driving record can come into play, including any suspensions and things like that. Unfortunately, something that you can’t control is family history. So if you have a case of uncles or parents dying prematurely, that’s going to affect your policy. So conditions like heart disease and diabetes. And this is really one of the advantages of the employer term policy, since it’s a group term, it’s usually a guaranteed policy so that you don’t have to go through the medical exam. And these individual policies that you will purchase yourself so you have to go through this. So obviously your age, your health history, the family history, your coverage amount — obviously, the more coverage and the more term will have a big impact on your overall premium. And then also lifestyle. So if you have risky hobbies, they’ll ask you if you bungee jump or scuba dive or things like that could potentially increase your premium a little bit. And you want to be open and forthright about how you live your life. It’ll affect the premium some, but you know, not terribly. And you know, insurance companies will cut you a break if you decide the entire annual premium all at once. They’ll be a little bit more expensive if you spread it out over the course of the year or so. I have some clients that they basically have a sinking fund that’s just covered for their insurance. So they put in their $100 a month or whatever, and then they pay out the $1,200 I think is what their current policies are and then they rinse and repeat that. And that saves them some money in the long run. So yeah, that’s basically some of the factors that they’ll look at when they’re quoting out some of your premiums and you know, you should be aware of those factors.

Tim Ulbrich: Yeah, I think many of the listeners are going to be hearing this and saying, ‘OK, I know I need a policy. I need to take action.’ And that’s, I think, one of our main goals if you’ve been following us at YFP for awhile is to help people build a strong financial foundation, whether it’s emergency funds, insurance protection, debt repayment plans, making sure you’re building a solid base. And obviously, this topic and this area is a good one in making sure you’re educated as you’re out there shopping. And we’ve talked about some things that you should be looking for. The last thing I want to mention, Tim, just to make sure we’re wrapping up this conversation here and people are thinking about their whole personal situation is that don’t forget any coverage for a spouse or significant other as well. And I know that’s one thing I’d overlooked is that you know, naively, I thought, well, Jess is at home with the boys, not necessarily earning an income. Why would I need life insurance? And obviously, the piece I forgot, which was naive, is what would be all the expenses that would come to be in the event of her death. Well, childcare, right? Additional expenses. So we actually went out and got a policy on her, a smaller amount, but making sure you’re accounting for some of those spouse or significant other considerations as well.

Tim Baker: Yeah, super important to figure that out. And I think in your case, I think, you know, when we interviewed you, you guys would want to move closer to family that would help you, obviously, raise the boys. But there’s still going to be an expense there that we’re going to need to cover down on in the event that something were to happen to Jess. So this is where it kind of gets a little bit tricky and having a planner kind of walk you through and ask those tough questions and try to figure out what does this look like? And by the way, what is the plan in the event that something happens in terms of how do we invest that? Or how do we appropriately plan for that? That’s kind of the next level of things. You know, obviously, coming into that windfall is going to be important to, again, provide some normalcy to life, but you know, you have to be smart with that sum of money and what to do with it. So yeah, lots of moving pieces and especially with kids and a mortgage and you know, one or two incomes, it’s important to kind of see how all those pieces fit together.

Tim Ulbrich: So as we wrap up here, let me just remind the listeners that if you want some more information about different types of life insurance, the pros and cons to those policies that out there, how to determine how much coverage you need like we’ve talked about on this episode and where to get a quote from a reputable broker, head on over to our educational page all about life insurance, which is yourfinancialpharmacist.com/life-insurance. And again, if you’re ready to go out there and start shopping for policies, you can head on over directly to the PolicyGenius page that we’ve partnered with, which is at yourfinancialpharmacist.com/insurance. So Tim Baker, again, good stuff and looking forward to the episode next week. You’re going to talk with Tim Church about disability coverage.

Tim Baker: Thanks, Tim.

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