Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research Inc., a broker dealer, member FINRA, SIPC. Investment advisor representative, Cambridge Investment Research Advisors Inc., a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. This is Nate Kreinbrink bringing you today’s show, second Wednesday of September. David Nelson was on last week for the first week live show, talking about the markets and some of the trends and interest rates and where we’ve seen some of those go. Third week, obviously we have either Andy Ferguson or Mike Van Zooten on talking about taxes. Some of the trends the last couple weeks, we’ve recapped some of the new tax laws that went into effect July 4th as part of the One Big Beautiful Bill Act and how those apply to it. Fourth Wednesday we usually shift the focus to Medicare, going over some of the key things will be a big topic coming up here in the next show or two with that one as the open enrollment period gets closer where we can look to make some changes on that.
So again, for today’s show though, I wanted to kind of switch gears. We talk investing, we talk Roth accounts, we talk IRA accounts, we talk Roth conversions, tax planning, retirement planning, income, cash flow, all that. One area that kind of gets oftentimes overlooked with that is insurance. And again, insurance is a part of the puzzle when you’re starting to look at your overall financial picture. But again, as I mentioned, it oftentimes gets overlooked. And what we find is that a lot of times people are either very much over-insured or very much underinsured and very few are times are people actually what you would call, I guess, properly insured. And again, the amount of insurance that a person needs, a couple needs obviously is very specific to that individual’s situation, cash flow, debt, income replacement, what it’s looking to accomplish.
And again, when we bring up the term of insurance, I mean it oftentimes gets a bad connotation. People think car insurance where they keep paying their car premium if they never get in an accident or wreck or anything, they don’t necessarily need it. Home insurance, kind of that same exact way. When we start looking at life insurance though, it’s important to kind of take a step back and, again, not necessarily look at it as an expense or as insurance itself, but again, as a piece to the overall puzzle. And it’s also to [inaudible 00:03:15] that the need for insurance and the amount of insurance may change as you go through the different phases in life.
For a newly married couple that may be just starting a family, maybe one spouse is a little heavier with the income coming in, you may want to look at income replacement as far as being able to have the surviving spouse and any children being able to, again, continue the lifestyle that was set up, being able to stay in the house that was maybe built, pay the mortgage, pay the bills, live the lifestyle, and again, not have to worry as much about cash flow. As someone that’s entering into age 60, 65, maybe mortgage is paid off, maybe a pension starts social security retirement accounts, one of the spouses pass away that income replacement may not be as prevalent or changes a little bit as you get to the different types.
So again, when you look at insurance, again, it’s important to look at it as a tool to accomplish a goal. And a lot of times with what we talk about is we always say we plan for the worst and hope for the best. Now obviously if insurance gets paid out, there’s obviously a detriment or a death that occurs in order to do that. So it’s not oftentimes a very fun topic to talk about. It’s an important one. One that people know that they need to kind of discuss and to look at. But again, it’s not a pleasant conversation to start planning for worst-case scenarios. But again, when you think of what is left behind, and again, having to kind of pick up the pieces after a loved one’s death, it’s important to kind of know that financially that burden may be taken off their plate as far as being able to be set up financially from doing that.
So again, looking at insurance, again, depending on what phase of life you are, what amount you’re trying to accomplish, it’s important to continue to look at it and doing it. And when we’re doing that, you can accomplish that in two different ways. And the main types of insurance are either permanent or term, kind of touch the basics of each one of those. When you think of term insurance, it’s kind of the most common. You have a certain time period, usually 10 years, 20 years, 30 years that that insurance policy is in place. There’s a guaranteed death benefit that is attached to that and that is chosen when you apply for the policy. So again, you pick the term, you pick the death benefit amount, and you continue to pay premiums through that whole time. And usually with the most common form of term, if you do a 20-year policy and it’s the day after the 20th anniversary, that policy is no longer in force.
Again, a lot of times insurance companies kind of evolve over time and a lot of the term policies nowadays have a convertible feature to it where, again, you can keep that policy in effect after that term ends. However, your premiums aren’t what they have been for the first 20 years of that policy. So if you were paying X amount of dollars for a policy, you get to year 21 and you want to keep it while your premiums are more than likely going to jump pretty significantly because, again, it’s going to factor in what your new premium is based off of your age. So every year that you would keep that policy, your premium is going to go up a certain amount.
So again, oftentimes pros of term policies is usually they’re a little cheaper are they only are for a specific amount of time, and if you want to keep that, they are going to be fairly expensive in order to keep them. The other part… Expensive in order… Common insurance is, again, not term, but now permanent policies and they’re just, what they say, term is for a certain term, permanent is for forever as long as you continue to make the premium payments as laid out in your application when you fill that out. Now, there’s different types of term policies. Whole life was a common one years ago and is still around today where it’s essentially a permanent term policy, where when you start the policy, your premium is going to be the same every year for the rest of your life. If you continue to pay that amount, your policy is in effect on the day that you die and that death benefit will be paid out.
Now, the difference with a whole life policy is that there is a cash value that is applied to that. With a term policy there is no cash value. You pay the premiums, that goes to pay your insurance amount each month or year or whatever, however, frequency you pay that, and that’s all there is. The death benefit. With a whole life policy, there is a cash value that is associated with that. So you make your monthly premium or your annual premium, a portion of that premium that you pay goes to the insurance cost, the remainder of that goes into the cash value. Now, the older that you get, you’re going to continue to pay the same amount, but a bigger percentage of that premium that you pay is going to pay for insurance and a smaller amount is going to go into the cash value bucket. Ultimately to a point where everything may be going to your insurance premium and there also may start taking some of the cash value amount that’s in there to help offset any premium cost.
There’s also different types of permanent policies now with universal life policies, guaranteed universal life, index universal life, all trying to kind of tailor to what it is that you are exactly trying to accomplish. So again, looking at what you’re looking at accomplishing with the insurance, income replacement, passing something on to the next generation, generational wealth, there’s different things to look at them as far as the need for insurance and each one of those is going to have a better fit, whether it’s the term permanent, what type of permanent that is going to go in there.
So again, what I would be cautious is to, again, looking at insurance, as I mentioned, as a piece of the financial puzzle, insurance policies that are paid out after you pass away, again, is one of the best things that you could pass on because of the tax favorable treatment of death benefit proceeds. So again, inheriting an IRA versus inheriting a death benefit is not going to get treated the same way when it comes to the taxes. So understanding those type of differences, the differences in tax of what they’re going to be able to provide, and then also what are we trying to accomplish? Because again, there’s so many different things and trying to understand the difference between the different policies. Sometimes what you think you have may not necessarily be exactly what it is that you do have.
So again, if you have an old policy that’s laying around, you’re still paying into it, you don’t even really know what type of policy it is, it’s probably time to take a look at that and say, okay, this is what you actually have. This is what you are paying for. This is the amount of insurance that you are actually buying. If you continue to pay into a policy and the cash value gets extremely high when you pass away, they don’t get the cash value and the death benefit. They get a combination to equal what that death benefit is. So the higher that cash value goes up, oftentimes you’re actually buying a smaller amount of insurance because when you pass away, it’s more of your own money coming back to you that you paid in the course of premiums over the life of that contract.
So again, a lot of variances, a lot of differences, a lot of terms that again, people don’t deal with on a regular basis, so they’re not familiar with them. So again, I would just caution you, if you do have any questions on an existing life insurance policy, maybe looking at upgrading a policy that you do have, or if you don’t have anything and think it’s probably time that that becomes up to more top of the list priority to you, let us know. We’d be happy to just sit down and just go over what you have and see if it’s still checking all the boxes that you originally intended it for when you first took that policy out. So give us a call. I’d be happy to help you.
Again, get chatting and get running out of time here. But I do want to mention that every Friday, Nelson Corp Wealth Management is wearing jeans for charity. Money raised in the month of September will be donated to the Skyline Center here in Clinton. Again, this is Nate Kreinbrink bringing you this week’s Financial Focus. Thanks for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in the show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker dealer member FINRA, SIPC. Investment advisor representative Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.