In my last article, in the August issue, I spoke of liberating money so that it can work best for you. I think it is time we took a good look at a subject that most would rather not discuss—life insurance. Here is a quick question for you: Which one do you own? “Life” insurance or “death” insurance? You say you aren’t sure? Maybe I can help you tell the difference. I’ll bet you didn’t even know there was a difference. Trust me, there is a big difference.
Death insurance is what a lot of people buy thinking it is “life” insurance, because that is what they are told it is. A salesperson gets in front of them and “backs the hearse up to the door” and they buy a policy to take care of their family. They are told they are buying “life” insurance. Is it life insurance? No, it’s death insurance. Each year the premium comes due and they pay the premium and say to the insurance company, “I am going to die.”
The company takes their money and looks at the actuarial tables and says, “No you aren’t!” Every year thereafter, this game continues and the company gladly takes their money because they know they will win.
As the person gets older and the “odds” swing more in their favor, the company charges them more to “play the game.” Now they pay and say, “I am going to die,” and the company says, “You might, so we are increasing the cost.” Eventually, if the person stays in the game—which most don’t—the cost will increase to a point that the company will price you right out of the game, and that is exactly what they want to do. Even if the person sticks around and eventually “wins,” they will pay in more than they would get back as a death benefit. Very simply put, you have to “lose” to “win” and, even if you do win, you really “lose!”
This is “death insurance.” The most common name for death insurance is Term Insurance. Like the name implies, it is designed to cover you for a specific period of time. Statistics show that the average term policy is for only two years. It seems like most people buy it for the purposes it was designed for, or they realize that it is just death insurance and convert it to life insurance.
“Life insurance” is designed for those who feel that they might fool everybody and may, in fact, live a little longer than those with a death wish who buy death insurance. They figure that if they do live, they might as well be able to put those dollars they have been giving to the insurance company to work for themselves in the form of a retirement income. “Life” insurance also allows you to tap those dollars at any time without triggering any type of tax penalties or income tax liabilities. Those dollars accumulate in a totally tax sheltered environment, too. These dollars are also sheltered from anyone trying to seize them in a lawsuit or in case of bankruptcy.
“Life” insurance also has a “death” insurance benefit included within it so if, in fact, you do decide to exit this planet prematurely, there is a benefit that is paid. However, the reverse is not true for just plain “death” insurance. It does not have a “life” insurance feature built into it. Some feel that you can add that feature buy investing those extra dollars into a separate fund. That may be true, but the special tax features that are included in “life” insurance do not roll over to this outside investment. All earnings are taxed as earned. If you see a comparison, make sure that you are looking at the “net after tax” return on the outside investment versus the return within the “life” insurance policy. Also a 15% return really looks good on paper, but is it realistic over a long period of time? Maybe a more conservative return would be a fairer comparison.
In this day and time of ever increasing restrictions on qualified retirement plans, many professionals are looking for ways to simplify their lives and avoid paying additional fees to maintain a qualified retirement plan, such as a Pension or Profit-Sharing Plan. They are turning to a “life” insurance plan that is funded with additional dollars that still accumulate in an environment sheltered from any taxes. There is no requirement to include any employees, and there are no fees to pay to keep this type of plan up to date. Like any “life” insurance plan, the cash within these plans can be used at any time, without any tax liabilities.
How well do these plans work? Here is an example of a plan that I just set up for a chiropractor. He is age thirty-eight and will deposit $2,000 each month into this program. At age sixty-five, he will start withdrawing a retirement income of $90,000 per year until age one hundred, totally tax free! He will pay in a total of $648,000, and take out a total of $3,150,000, tax free. Yes he will pay taxes on the dollars going in so his total tax liability is $7,200 per year at a 30% rate for a total of $194,400. If he had a qualified plan, he would pay taxes on the money coming out, so to yield $3,500,000, he would have to have $4,550,000—a total tax of $1,050,000. Which is better? Pay a tax now of $194,400, or pay it later for a total of $1,050,000—a difference of $855,600. Yes, the outside plan may earn higher interest, but then the tax is higher.
By the way, this doctor had a qualified plan and got rid of it a few years ago. He got tired of putting money away for employees and watching them leave and take the money with them. He also got tired of paying a lot in fees to keep his plan current with the ever-changing tax laws. Between the employee contributions and the fees each and every year, it exceeded what he was able to put away for his benefit. He figured it wasn’t worth it and he was right!
Okay, it’s time now to pull out all those old policies that you have in the bottom of a drawer somewhere and see what you, in fact, own. Is it life or death insurance? Better yet, is it doing the job that you now want it to do? Are the beneficiaries correct and up to date? Do you have any special “riders” that are added to the policies that have out-lived their usefulness? By the way, a review is something that you should do at least every two years unless there has been some major change in your family status or size. In that case, it should be done at that time. It is important to keep things current and up to date. I hope this has helped liberate a few more dollars to work better for you!
Stanley B. Greenfield has been engaged in the fields of Financial Management and Insurance since 1962. He is a Registered Financial Consultant, and was awarded the designation of RHU, Registered Professional Disability and Health Insurance Underwriter, in 1979, as one of its Charter Members.
Mr. Greenfield has authored thousands of articles concerning tax, financial, and practice management, and has spoken throughout the world on these subjects to both business and professional associations. He is a regular contributor to numerous other professional journals.
Mr. Greenfield also serves as a member of the Board of Directors of the Florida Chiropractic Foundation for Education and Research. You may reach him at
, call 800-585-1555 or 904-513-2229 or visit his website, www.stanleygreenfield.com.