In this episode, Elliot Kallen brings on Tracy Tamura to dive deep into the often-overlooked world of life insurance for wealth protection. The discussion spans a wide range of topics, from the importance of life insurance in personal financial planning to its critical role in business continuity and estate planning. Tracy also offers her expert perspective on innovative products like accelerated benefit riders and talks about potential changes in estate taxes.
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Meet Our Guest
Regional Vice President | Midland National Life
Tracy Tamura is a seasoned professional in the life insurance industry. She serves in a leading VP role at Midland National Life, one of the prominent life insurance providers in the United States. With a solid grounding in all facets of life insurance, Tracy is adept at navigating the complex landscape of policies, riders, and benefits. Her expertise lies in helping individuals and businesses understand and leverage life insurance products to secure their financial futures, protecting them against uncertainties.
How Much Life Insurance Do You Need for Wealth Protection?
First off, when it comes to determining the right amount of coverage, it isn’t as simple as picking a number suggested on television. That figure is usually generalized, not tailored to meet individual needs.
There’s an efficient method to evaluate your insurance needs, coined as the “DIME” method. DIME stands for Debt, Income, Mortgage, and Everything else – including final expenses, education costs for children, and other anticipated expenses.
For people living in the Bay Area or similar high-cost-of-living areas, the calculation should revolve around immediate needs. If something unfortunate were to happen to you today, how much would your family need financially to maintain their standard of living and fulfill their obligations such as a mortgage?
Second, there are various calculators available to simplify this calculation. Let’s illustrate this with an example. Consider a 35-year-old individual earning $100,000 per year, with one child and a mortgage. In a location like the Bay Area, it’s not unlikely for the mortgage to be upwards of half a million dollars. If we consider college costs for a newborn child today, projected 18 years into the future, the figures climb rapidly.
Income replacement is another vital consideration. We need to assess how many years’ worth of income we want to replace. Most insurance carriers recommend a 20 to 25-year period of income replacement for a 35-year-old. With all these factors considered, the total insurance coverage can quickly escalate to 2.5 million, 3 million, or even 5 million dollars, especially for residents of high-cost areas like the Bay Area.
Term vs. Permanent Life Insurance and the Role of Cash Value
So, let’s approach this topic from a diagnostic standpoint, focusing mainly on the two primary types of life insurance: term and permanent. One can think of term insurance as akin to renting. As long as you pay the premium, the coverage remains in effect. Though a 10-year term might seem reasonable to some, especially given frequent television advertisements promoting such periods, time tends to fly. If we revisit our example of the 35-year-old, we’d likely recommend a term coverage spanning at least 20, possibly even 30 years, to cover the period of greatest financial need.
Term Life Insurance
Term insurance is a temporary solution designed for short-term, substantial needs, whereas permanent insurance, as the name suggests, provides coverage for your entire life. Most people outlive their term insurance and those who don’t typically succumb to unexpected accidents or terminal illnesses. As individuals age, they often begin to consider the additional benefits that life insurance can provide, not just the death benefit, but also the living benefits offered by many policies.
Permanent Life Insurance
This is where we delve into the importance of permanent insurance and its inherent question, “Do you want life insurance in force when you die?” Without any certainty of life’s timeline, the optimal solution generally involves a combination of term and permanent insurance, contingent on one’s budget.
Beyond the basic death benefit, many modern life insurance policies offer additional features. For example, the death benefit can serve as a pool of money that can be accelerated and accessed during certain health crises like chronic, critical, or terminal illness. This benefit, received tax-free, can be used during the policyholder’s lifetime.
Cash-value Life Insurance for Wealth Protection
Cash value, another feature of many life insurance policies, can be confusing. It might sound like a fictitious term, but it essentially refers to an alternate savings or asset-building mechanism within your policy. When investing in the market, you diversify across various stocks for a balanced portfolio, and life insurance can be a part of that diversification strategy.
One compelling reason to consider cash value is its tax advantage. Unlike withdrawals from 401ks or Individual Retirement Accounts (IRAs) which are taxed, money pulled from the cash value of a life insurance policy can be tax-free, much like a Roth IRA. This tax advantage can be particularly useful during specific scenarios, such as during a market downturn when it might be beneficial to pull tax-free money from your life insurance policy and allow your other investments to recover.
Understanding these concepts is crucial, as they can be tailored to fit individual needs and circumstances. It’s not just about providing a death benefit; it’s about optimizing your financial strategy for the long run.
The Complexity of Cash Value Insurance: Whole Life and Index Life Policies Explained
Next, let’s delve into the historical evolution of life insurance policies rather than comparing them competitively.
Originally, all life insurance policies were Whole Life Insurance. These were the financial safety nets during the Depression era; people would forfeit anything but their life insurance policies because of the value they provided to their families.
The cost structure of whole life insurance led to the advent of Annual Renewable Term insurance. In this model, policyholders would pay a certain amount one year, and the price would incrementally increase each subsequent year, reflecting the increased risk with age. However, this model wasn’t particularly profitable for insurance companies.
To rectify this, insurance companies introduced level-term insurance, where the premium remained constant throughout the term. In the early years, you’d pay more than technically necessary, and towards the end, you’d pay less. As a result, many policyholders choose to terminate their policies at the end of the term due to a significant cost jump, a function of the levelized premium structure.
Whole life insurance provides three specific guarantees: guaranteed cash value, guaranteed death benefit, and guaranteed premium. However, if flexibility and market participation are important to you, you might find Whole Life policies too structured. This led to the creation of Universal Life insurance, designed for individuals wanting more flexibility in their life insurance policies.
There are numerous variations of universal life insurance, including those that allow you to directly invest in the market, known as Variable Universal Life policies, and others that follow an index but don’t directly invest in it, known as Indexed Universal Life policies. These policies are designed to cater to the increasingly complex financial needs of policyholders, offering more flexibility and investment options.
Life Insurance Strategies: High Net-Worth Individual Wealth Protection
When we observe that high net-worth individuals constitute a substantial segment of life insurance holders, it points towards the inherent value that these policies provide. Let’s explore what these benefits are.
Regardless of the contract type, whether term or permanent, one common feature is the guarantee that these policies offer. These guarantees provide a safety net of sorts, ensuring predictable returns and a stop-loss function. On top of this, life insurance policies also present the opportunity for significant growth, attributable to tax advantages that are largely unavailable with other types of investments. The investment growth coupled with wealth protection is paramount.
Then, of course, we have the death benefit, a critical aspect of life insurance policies. High-net-worth individuals often utilize this benefit as a strategy for estate tax planning and intergenerational wealth transfer.
Think about it this way – if you invest $1 and that investment could serve multiple functions, each adding value to your financial planning, wouldn’t it be prudent to consider it?
Historically, these benefits were largely accessible only to the wealthy due to the high investment levels involved. However, with the flexibility and varied options available in today’s insurance market, these advantages can be enjoyed by a broader demographic.
Strategic Application of Life Insurance in Business: Protecting Key Employees and Business Continuity
Life insurance for wealth protection can be an effective tool in a business context, especially when it comes to safeguarding the company and its key personnel.
Suppose you have a key employee whose loss would significantly impact the business. You might want to consider how best to prepare for such an eventuality. Would you want to set aside dollar for dollar the sum it would take to replace them, or would you rather share some of that risk with an insurance company? In essence, insurance companies are designed to leverage money, and collaborating with them allows you to mitigate some of these potential risks.
A similar principle applies when we discuss buy-sell agreements in a partnership setting. If one partner passes away without a financially backed agreement for the buyout of their shares, the situation can become legally complex. Consider a dependent spouse who has relied on the business’s income for years. After the death of their partner, they might value the business higher than the surviving owner, potentially leading to disputes.
Therefore, having an agreement in place detailing the financial processes can be extremely valuable. Yet again, the question arises: do you want to set aside the entire sum needed, or would you prefer to work with “discounted” dollars provided by an insurance policy?
Moreover, if a key employee never falls ill and retires, you can potentially hand over the life insurance policy and its cash value as part of their benefits package. Ultimately, life insurance offers a strategic way to use your assets effectively, benefiting the business in the long term. It’s another insurance mechanism that helps navigate potential business pitfalls efficiently, with the insurance company aiding in hedging those dollars.
A Strategic Tool for Business Continuity and Retirement Planning
Let’s say you’re a business owner and you have plans to eventually sell your company, or perhaps pass it on to your children. But what happens if you suddenly suffer a serious health crisis, like a heart attack, and die unexpectedly?
Consider a hypothetical scenario: you believe your business is worth around $10 million, but your sudden death significantly reduces its perceived value. Having life insurance coverage can help mitigate this issue by providing the expected financial value even if you’re not around anymore. Term insurance is a simple way to achieve this. It could be set up for the anticipated period you intend to retain the business before selling it. This form of insurance also plays a vital role in buy-sell agreements.
It’s also important to look at the financial options available to business owners. Many don’t have access to retirement savings structures like 401k plans. Small business owners may provide such facilities for their employees, but often they themselves have limited capacity to save and potentially need to save more due to their lifestyle or retirement expectations.
A life insurance contract can help solve this problem. It can function as an asset that offers non-qualified supplemental retirement funds, which can be withdrawn tax-free. When it comes to generating retirement income, having a combination of taxable and tax-free accounts provides the most flexibility. Depending on the tax landscape, there could be periods when drawing from a tax-free account is more beneficial than a taxable one.
The goal is to provide business owners with diverse options, instead of a singular solution. By doing so, we ensure that they’re in the best position possible when making decisions regarding their business and personal financial future.
Estate Planning and the Importance of Timely Tax Management
It’s worthwhile to consider the impact of estate taxes, especially if your assets, including your business, total over $25 million. While the current exclusion is more than $10 million per person, which may seem irrelevant for many, the consequences of not correctly managing an estate of this magnitude can be significant. If not properly planned, your family could face a tax bill running into millions, which might force the liquidation of assets.
Let’s be clear: such tax bills usually have to be settled immediately. Therefore, for high-net-worth individuals, planning for these eventualities is crucial. For those interested in this subject, I recommend the book on the Mondavi family. It’s a fascinating read and provides real-life insight into the perils of not appropriately managing estate taxes. Notably, today, the Mondavi Winery, a name most people recognize, is no longer owned by the Mondavi family. This unfortunate situation arose because the family didn’t adequately plan for their sizable tax bill.
The question remains: is this a conversation worth having now? Yes, it is. In 2025, the current estate tax laws are set to sunset, and while the exact figure is not yet confirmed, most people expect it to reduce to around $6 million. That would mean $12 million for a couple. Many couples could find themselves in the multimillion-dollar bracket by the time of their passing.
Therefore, it’s crucial to have these discussions now, not to delay them. Financial advisors, such as Elliott, are available to guide you through these complex issues. With their expertise and the support of a wider team of professionals, you can navigate these situations effectively. There is no reason any family should face the predicaments the Mondavi family did. Reading their story is a compelling and educational journey, showing the critical importance of proper estate planning and timely tax management.
Understanding Long-Term Care Riders in Life Insurance
Many insurance carriers offer Long Term Care riders that can be purchased within a permanent life insurance plan. At Midland National, for instance, we offer something a bit different, known as an ‘accelerated benefit’, also commonly referred to as ‘living benefits’. This feature allows the insured to accelerate their death benefit in the event of a qualifying ailment.
What’s significant about these benefits is that they are more comprehensive than a typical long-term care rider, and they don’t carry any upfront cost. However, if you need to use them, there will be a cost involved, which is reasonable considering you’re getting early access to your death benefit. But if you don’t use it, say, because you don’t suffer from Alzheimer’s, dementia, or a severe physical injury that leaves you incapacitated, you won’t have to pay for it. Moreover, some contracts even offer a return of premium if you reach an age where you no longer consider the risk significant to you or your beneficiaries.
We can’t predict the future or foresee potential health issues. Also, the future cost of healthcare remains uncertain. What we can do is plan and prepare by integrating such safeguards into our life insurance contracts today, offering flexibility and protection based on mortality rates rather than morbidity factors.
For instance, suppose you have back problems. In that case, you may not qualify for traditional long-term care, but if you’re managing your health well and not heavily dependent on medication, you could still receive a preferred plus offer from a life insurance company.
In summary, it’s essential to know that there are alternatives to depleting or spending all your assets on a long-term care plan. That’s not to say long-term care or long-term care insurance isn’t important. But with the escalating costs, it’s worth considering how much risk we are willing to take and what other options we might have at our disposal.