Untangling whole and term-life insurance
Tess Vigeland: And it's time to reach into the mail bag and see what you, dear listener, have had to say over the last few weeks about our lovely show. And that crinkling of papers is our senior producer Paddy Hirsch reaching into the mailbag.
Paddy Hirsch: It's a deep dive Tess.
Vigeland: And is it a good dive, is it a happy dive or is it a sad dive?
Hirsch: It's a pleasant dive, it's a pleasant dive.
Vigeland: Good, I'm always glad to hear that.
Hirsch: So yeah, we had some good letters, some interesting letters. A lot of support. Although Joel Patterson wrote in from Petersburgh, N.Y. saying that he was a bit worried that in the last show we had a couple of sad stories. And he was worrying that the grim state of financial affairs in the country at large have seeped into the heretofore sunny show.
Hirsch: Care to comment Tess?
Vigeland: I'm sunny! I'm sunny and bright. But yeah, you know, I have to say, especially when it comes to our callers, they've got problems and they are not pretty ones.
Hirsch: Yeah, that's true. But one of the problems that I'm happy to say that we may have solved is the previous week we were tackling the whole issue of the graduated income tax system. We spoke to Nancy Marshall Genzer about that, and she had a great analogy of a chocolate layer cake.
Hirsch: And R.O. Mitts wrote in from East Lansing, Mich. saying, "Thank you for actually explaining -- somewhat -- how a graduated income tax system works." So I might actually do a little Whiteboard on that as well, because I thought it was a really really good analogy. I might steal that from her.
Vigeland: I like that. And she made me hungry, so perhaps your Whiteboard will make me hungry as well. More cake.
Hirsch: Well, you've got all those leftovers from the Super Bowl you can eat.
Vigeland: No, but it really was a very apt way to describe the income tax and what we were trying to say is that if you think you know what your income tax rate is, you probably don't.
Vigeland: So here's a way to understand it.
Hirsch: Another listener wrote in, Gerry from Grand Ledge, Mich., again, wrote in. He was talking about your conversation about the whole issue of one spouse having a different income from the other and how you can match your sort of financial affairs when you come together in a marriage.
Vigeland: Right. This was a caller, again in our call-in segment, wondering... I think he was recently engaged and wanted to talk about what to do with their merged finances. We talked about the "yours, mine and ours" approach. That's not the approach that we take in my household; my husband and I share all of our finances. And I said that's because I just believe that if you're merging your lives, why would you leave out one of the biggest elements of your life, which is money? I will say that on Twitter, Steve Stewart (who goes by the handle @moneyplansos), he said, "Way to go Tess for sharing your belief about joint accounts in marriage. Thank you." And then he said -- this is interesting -- "Having a joint account in a marriage causes more arguments, but separate accounts causes more divorce." Something to think about.
Hirsch: Certainly something to think about. So I think the one that really flagged me this time, or I flagged this time, was this question of the difference between whole-life insurance and term-life, which we tackled a couple of weeks ago.
Vigeland: I noticed that there was quite a bit of mail on this.
Hirsch: So you were talking with Kathy Kristoff about this, and you know, you both said that there are reasons for buying whole-life, but there are also lots of pitfalls to it. And that most people, most financial advisers tend to recommend that you buy term.
Vigeland: And that that is pretty much what we tend to say on the show, week-in and week-out, is that if you're going to do this, buy term.
Hirsch: Exactly. We got two types of letters, basically. Some people wrote in saying, "Whoa, I have got a whole-life insurance policy. I got it I was very young, 19, 20 years old. A friend sold it to me. I have no idea what I should be doing with this. Should I get rid of it" -- it was kind of like the caller who we spoke to, actually. But then we also got a lot of letters from people who are really defending whole-life in a really kind of dramatic way.
Vigeland: Were they insurance agents by any chance?
Hirsch: Well, I think some of them were insurance agents. And indeed, I actually went online to sort of research this over the weekend. And all the blogs that talk about this stuff, you have all of these insurance agents who pile on, defending whole life. And you know, I looked at some of my paper work, my term-life insurance and a friend's whole-life insurance product and I was trying to compare them. And I couldn't really quite understand it, so I called a friend.
Vigeland: You called a friend! A life line!
Hirsch: I called a life line. In fact, I have that life line open today. Right now.
Hirsch: For us here. Hello? Hello?
Jill Schlesinger: Here comes your life line.
Vigeland: It's Aunt Jill!
Schlesinger: All the way from the Upper West Side of New York City.
Hirsch: This is Jill Schlesinger, editor-at-large at CBS MoneyWatch.com.
Hirsch makes trumpet sounds
Schlesinger: I love that. It is such a pleasure to be with you.
Vigeland: It's great to have you on the program!
Schlesinger: Does it say something about me that the New York football Giants was playing the Super Bowl, but prior to that, I still found time to talk to Paddy Hirsch about life insurance? Because a. I love Tess and Paddy so much and b. I have so many opinions about life insurance.
Vigeland: And you have no opinions about the Super Bowl, right? We're not gonna talk about that.
Schlesinger: I understand, I understand your problems.
Hirsch and Vigeland laugh
Schlesinger: I understand you're bitter. I understand that.
Vigeland: Yeah, I'm wounded.
Schlesinger: I'm sorry.
Hirsch: Schlesinger, before we get into this, I want to trumpet your qualifications -- 'cause Jill is not only the editor-at-large at CBS MoneyWatch.com, she's also a former financial planner, been financial planning for 15 years, I believe.
Schlesinger: Yeah, it's been a long road. And you know, one thing that's really interesting is that as financial adviser, investment adviser, you get really used to these comments when people will say to you, "I have this whole-life policy, this, that and the other thing." And then you get angry mail or comments from the person who sold the policy and how dare you say anything bad about that. So I understand why your mail bag could be filled with some criticism. It's a very thorny topic, the insurance business.
Vigeland: Well then let's try to sort this out a little bit, because insurance alone is just a confusing topic, no matter whether you're talking about car insurance or home insurance or life insurance. But particularly when it comes to life insurance, people just don't know what the basics are. So let's back it up just a moment, and I know we did this with Kathy a couple of weeks ago -- but Jill, can you tell us the difference between whole and term?
Schlesinger: Well, you know, let's make two big categories: One is term-life insurance, which is exactly what it sounds like. You buy life insurance coverage for a specific term, some amount of time. And for that period of time, you're covered by your insurance, but the day after your coverage is complete and you happen to die that day after, no death benefits. So it's just for a term.
Hirsch: So that's kinda like just buying insurance for a car, like you insure a car for five years. If the thing gets smashed up during that five years, you get an insurance pay out. Once the five years is over, then you're done.
Schlesinger: That's exactly it. You know, it is pretty to go out and buy different terms. And you go out and buy for the term that you will need. So if your kids are really young, you might need it for 20 years, so you pick a term that matches up with your life.
Vigeland: And then the key is that you better re-up before that term is over. Otherwise, you're gonna have to get a physical again and all that, right?
Schlesinger: Right. Although, for lots of people, they don't need to be on that term. Because if you think about it, what's really happening in the 20 years -- let's just say that Paddy and I are married -- I should be so lucky, by the way.
Schlesinger: I mean, you know. C'mon.
Vigeland: Eileen got him first.
Schlesinger: Darn it! The accent will get me every time.
Vigeland: I know.
Schlesinger: So here's the thing: Paddy and I are married, and let's say we're younger and we've got young kids. And we really need coverage until those kids are grown through college. If you kind of think of an upwards sloping graph, you've got one line sloping up, which is your savings rate. You're saving your money and you're mind your 401(k), that's increasing. And at the very same time, over the course of the term, your life insurance needs are decreasing, becasue your kids are growing up and you're saving more. Your need for insurance really starts to diminish are your retirement assets start to bloom.
Hirsch: That's assuming your spouse hasn't spent all of your money on shoes and handbags.
Schlesinger: I don't know why you're saying that about me. We've only been married about eight minutes.
Schlesinger: Why do you have to go there?
Hirsch: Your reputation proceeds you, I tell you.
Schlesinger: I guess so. Hm, interesting.
Vigeland: What did you say about the Upper West Side?
Schlesinger: Yeah, exactly.
Hirsch: OK, so we've taken care of term. What about whole-life? What do you I need that for?
Schlesinger: OK, so not even just whole-life; let's call it "permanent-life." Because permanent-life is some coverage that stays enforced for your entire life. And permanent-life can come in lots of different flavors. One flavor is whole-life insurance, another flavor's called "universal-life insurance" and a third flavor is called "variable-life insurance." But let's just conceptually talk about permanent-life insurance.
Well, there are some cases where I have seen that you really do need life insurance for your entire life. Example: Number one, let's say that you are doing estate planing and you really have this big huge estate. You know, again, let's pretend I'm married to Tess. She's got $10 million socked away.
Vigeland: Oh, that's only what I've told you about.
Schlesinger: I know! Gosh! Now, when you have a large estate -- over $5 million -- you're gonna have an estate tax that's due upon your death. So a lot of very wealthy individuals buy permanent-life insurance, because they want insurance to trigger at the death of somebody, that then goes into a trust that then pays the estate taxes. So that's kinda like the rich person's view.
If you're the parent of a child how has needs, if you have maybe a severely disabled child, or not even severely, but someone who you really wanna provide for after your death. In those cases, you want to have whole-life. If I had a child, perhaps I'd have insurance, permanent insurance that would stay enforced. And then when I die, the proceeds pass into something called a "special needs trust," that trust is set up by a really smart estate attorney who can deal with these issues. And then that money is available to help provide for my child or whatever relative -- sister, brother -- upon my death -- and does not actually prevent that person from getting federal assistance.
OK, now we have estate and now we have special needs. Who else? Well, it's the money that you put into a policy is not just paying for life insurance; it's paying for an investment component.
Hirsch: And a lot of people get sold this stuff in all walks of life based on this investment component.
Vigeland: And that's where I think we had a lot of questioning about "well, isn't this a way for me to leave my kids a bunch of money?"
Schlesinger: It's an expensive way to do it.
Vigeland: There you go.
Schlesinger: And that is why if you talk to most investments advisers -- and when I say investment advisers, I'm talking about people who are licensed, they have what they call a "fiduciary responsibility." They've gotta put their clients' needs first; it's like I have to take care of you as if you were my ward. And if you ask those people "how often do you write permanent-life insurance?" they'll say, "One out of 10 times." And the reason is that this is a very expensive way to leave a legacy to your children.
Hirsch: I really wish I had known all of this stuff when I was 20 years old and got hawked a ridiculous product from a friend of mine.
Vigeland: Oh dear.
Schlesinger: It's always the worst when it comes to the friend. And I had a client once who said to me, "But my brother-in-law sold this to me." And I said, "Hm." And she looked at me and she goes, "You're telling me that my brother-in-law blanked me?" And I said, "Yes I am."
Vigeland: Ai yai yai.
Hirsch: Well, I'm gonna conclude by reading another part of this letter that Gerald Goffin wrote from Michigan, where he said that listening to the show, he found it ironic that Kathy Kristoff essentially told the caller to dump that life insurance product. And then Tess ended the segment by saying, you know, talk to your financial adviser before you make a big decision. And Gerald said to himself, "There's a good likelihood that many listeners have financial advisers that are selling that whole life insurance policy."
Vigeland: Yeah... there you go.
Schlesinger: Yeah. Let me give you a good idea: If you don't know what to do, and you're feeling a little bit weird. This guy takes you golfing or it's someone you've known or it's a relative -- get yourself to a fee-only financial adviser. You just pay for a half hour and sit down with that person and say, "Let me show you this product. Let me tell you about myself and I want you to tell me exactly what you think I should do." Make sure you understand what it will cost to get out.
Schlesinger: There are so many policies; they have what is called a "surrender period." If you blow out of this in the first year, you're gonna pay a 10 percent penalty to get out.
Vigeland: Ouch indeed.
Hirsch: Well thanks very much indeed Jill. Thanks for joining us.
Schlesinger: It's a delight!
Vigeland And thank you Paddy for joining us with the mail bag. Lots of good stuff there!
Hirsch: Oh it's a pleasure.