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.
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Mentioned on the Show
- YFP Life Insurance Resource Page
- PolicyGenius
- YFP Episode 010 – Is Whole Life Insurance a Good Investment Strategy for College Savings?
- YFP Episode 032 – Finding Your Why (Part 1) – 3 Life Planning Questions
- 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.
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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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