It is always a pleasure speaking to someone that is passionate about his or her craft, which is why my discussion with Brandon Unger of Algren Associates was so beneficial. Brandon and I took a deep dive into the world of life insurance, but he was still able to share, through a high-level lens, important guidelines about the field as well. Anytime I work with someone who understands their craft well enough to take complex ideas and explain them in a simpler way, I know I’m speaking to a professional. So with that… here is an overview of our conversation.
Brandon’s background in insurance comes mainly from his time at Algren Associates, an insurance company based in New York City. As Brandon notes in our discussion, Algren is a specialist that helps financial advisors with special life insurance cases. Viewing it from the world of a medical professional, I think of my job, in the role of financial planner, to be akin to the primary care physician, and Brandon as the specialist to consult for specific problems.
I would encourage you to listen to full interview of this episode of ‘Planning on Call,’ the podcast, here:
Follow the links below to listen to The Atlas Advantage on Apple Podcasts, Spotify and Libsyn:
The first type of life insurance to understand is term life insurance. With term life insurance, an individual pays a certain amount (usually monthly, called a premium) and if they die, before their policy is up (subject to any policy specific terms), their beneficiaries would get a set payout amount (known as a death benefit). If an individual, for whatever reason, stops paying their premiums… they will ‘lapse’ on the insurance policy and their beneficiaries will no longer be eligible to receive a death benefit. Term insurance lasts for a set time, usually less than their life expectancy. Once the ‘term’ is over, one would need to buy a new policy. This new policy is generally going to incur a higher premium for the same death benefit (provided the person is still insurable), because the insurance company takes on more risk insuring an older individual.
Term insurance, is generally, the least expensive form of insurance from a premium standpoint. Brandon notes the way to use a term insurance policy is to ensure a certain need can be met in the event of their death. In many cases, the needs are income replacement for their loved ones if something were to happen to them and liquidity at death. Liquidity at death insures is intended to cover expenses surrounding death (closing an estate, paying for a funeral, etc.), so the expenses will not become a great financial burden on their loved ones.
Income replacement can be a little harder to define. Brandon discourages thinking of it as adding up potential lifetime earnings and insuring that amount. In the case of doctors, this would be quite a hefty sum and would therefore be very expensive. Brandon instead recommends thinking of a job as a money making ‘machine’. If that machine were to break down, how would the family’s goals be compromised? Could the family maintain their general living standards? Children’s college costs? Debt repayment? Whatever the goals may be, they would need to ensure they have a death benefit that can create a new ‘machine’. This new ‘machine’ can make money as well, by investing in vehicles that target production of income and capital gains over time. Thinking through a life insurance plan, in this way, is very important and may help individuals save money on premiums in the short term. More importantly, this type of detailed planning really helps families if anything were to happen to the plan holder because a plan is ready to spring into action. Without this type of planning, Brandon notes that individuals could see the death benefit as a scratch off ticket and spend the money quickly, and unwittingly.
The last note Brandon had on term policies was to remind us that not all term policies are created equal. While term could be considered the most basic form of life insurance and most of the important details to note are the obvious ones – premium amount, term length, and death benefit, there are also other important considerations. Working with both an advisor you trust and a reputable company is important. It is important to note that whether a term policy has a ‘conversion privilege’ should be a part of the conversation as well. This provision provides for the ability to convert a term policy, which contains a set end date, into one that can last their entire lifetime without retaining a completely new policy. This is important if a health condition should arise during the policy’s term. Deteriorating health can make getting a new policy more expensive, or in some cases impossible, because an individual in poor health is seen as a larger liability for the life insurance company.
So what are the policies that can potentially last an individual’s entire lifetime?
These types of policies are commonly called ‘permanent’ life insurance policies. Within the realm of permanent life insurance policies, Brandon referenced two main types – whole life insurance and universal life insurance.
Brandon indicated one way to think of a whole life insurance policy is, similar to term life, but with a defined cash build-up within the policy as well. This increasing cash portion may allow the policy to stay in place for as long as desired (possibly up until death) and gives the insurance policy a savings feature as well. This also means the insurance policy will have higher premiums than term life insurance policies with the same death benefit.
Brandon explained the cash build-up option can work as a dividend that pays out to the holder of the policy. Current interest rates and the performance of the underlying insurance company determines the annual dividend payout. These policies usually have a ‘guaranteed’ cash build-up amount (guaranteed by the policy… unless the underlying company goes bankrupt) and any amount above this is the dividend. The guaranteed cash values are going to be comprised of your premium payments, minus the cost of insurance, commissions, etc. while the non-guaranteed component will be a combination of premium payments plus forecasted dividend payments over time (which are not guaranteed and will be based on interest rates, mortality expenses and performance of the companies underlying general account).
Brandon described universal life insurance as similar to whole life insurance in that it involves underlying insurance with at savings component as well. One main difference with universal life is the availability of ‘variable policies’ that allow investment into ‘sub accounts’. Universal life also allows for unpacking of the policy, which can get complex but also presents many possibilities. By placing more of an individuals’ premium in certain areas of the insurance policy, like the guaranteed vs. non-guaranteed portion of the policy, or even the death benefit vs. the investment portion of the policy, one can target many different outcomes. We will save more on this complex discussion for another time…
Now that we have discussed types of permanent life insurance policies, it is time to take a look at some of the benefits of permanent policies that Brandon detailed. First and foremost, are the tax benefits involved with the cash buildup portion of the policy. When the death benefit is received by the next generation, this amount is transferred tax-free if paid out immediately upon the insured’s death. The cash accumulation portion of a life insurance policy is also allowed to grow tax deferred, and furthermore the ‘basis’ (the amount contributed to the policy through premiums) can be taken out tax free. This means that if one takes all the cash out of the policy an individual can defer the tax on gains until that time and if they would like to only take a portion of the policy out they may be able to do so tax free. There is also the ability to takes loans out of a permanent life insurance policy. Therefore, if one has enough cash accumulated, one may be able to maintain a death benefit while still withdrawing funds through a loan or by taking out the basis permanently. Because of the ability to do these things, a well-funded permanent life insurance policy can potentially provide cash flow flexibility as well.
Another benefit to doctors is the fact that, in most cases, the cash build-up portion of the policy, as well as the death benefit, is creditor protected. As physicians are employed in a highly litigated profession, this factor can be important. In the case of physicians who decide to go into the world of private practice, they can utilize insurance in other important ways. Private practice owners may use life insurance death benefits to ensure that if something happens to one of the top earning physicians or co-owners, that the practice is able to continue on, by doing things like buying a deceased physician’s portion of the business out from surviving family members or paying for a new physician to come on board. They could also use the cash build-up portion of that insurance policy for that physician, but have it tied to their long-term employment at that practice (insurance used in this way can be called a ‘key man’ policy or ‘golden handcuffs’). Lastly, an individual can also potentially add on to life insurance policies through things called ‘riders’ that, for a cost, allow them to insure other liabilities, such as a long-term healthcare event. These benefits require investigations of their own, so expect deeper dives from me on these topics in the future.
Note that one may be able to find some of these benefits using other vehicles. For example, one can get many of the tax benefits and creditor protection through retirement plan vehicles like 401(k)s. However, these vehicles have contribution maximums and given physicians’ earning power, permanent life insurance policies may allow for savings beyond retirement plans. There are many considerations, and in some cases pitfalls, to keep in mind when purchasing life insurance policies, and you should discuss your specific situation with your advisor.
Brandon is the first to note, that one should never want to be insurance rich and cash poor. What he means by this is an individual should not commit to paying a large life insurance premium that limits an individual’s ability to do other important things such as fund retirement plans, buy a home, or save for their child’s college. Especially in the early years of a permanent life insurance policy, much of the ‘flexibility’ we discussed does not exist – so be careful of overextending oneself. Because of the way permanent life insurance policies are structured, in the early years of the policy most of the premium is going toward insuring the death benefit. Therefore, even though someone may be paying a high premium the cash balance, the policy may grow slowly early on. As years of premium payments go by (speaking in the case of decades here), the premium amount flowing to the death benefit lessens and the cash balance can grow more efficiently, ultimately allowing for much of the benefits and flexibility Brandon discussed.
All of this means, life insurance policies require a larger financial mapping early on, and if a person cannot afford it they may miss benefits available later on by lapsing on the wrong policy. So again, do not get into a policy that cannot be afforded. One method Brandon suggested for physicians early in their career, when cash flow is tight, is to do what he calls ‘laddering’ insurance contracts. That means buying a small permanent policy with a conversion privilege, and then laddering a larger, cheaper term policy on top of that to protect the family if something were to happen. Then look to increase the permanent insurance later on once cash flow has increased.
This brings us back to an early piece of advice Brandon brought up, that he stressed throughout the conversation – “use a good advisor when purchasing life insurance.” One tactic that may be used in the life insurance field is to rely on the ‘non-guaranteed’ portion of the cash buildup when selling a permanent life insurance policy. It is important to know that the non-guaranteed portion is variable and if someone is using too high of a dividend (return) rate assumption, the policy may not do what the purchaser expects in the long term. This is why Brandon recommends checking on a life insurance policy quarterly. Doing this, can help ensure that the policy continues to provide the death benefit the purchaser intended (as well as keeping up on other items like having up to date beneficiaries).
To find a good insurance broker, Brandon recommends asking a trusted source for a recommendation. There are also resources available to research insurance brokers online, such as broker check (https://brokercheck.finra.org/). If only using a fee-only financial planner, such as Atlas Private Wealth Management, ask them for a referral as part of your annual financial plan as well.
Another important factor to review when looking for an insurance broker is to find out if they are ‘captive’ or ‘independent’. Captive means an insurance broker is employed by a certain insurance carrier to sell that carrier’s products. Independent means the broker has a greater ability to choose among several different insurance carriers. It may make sense that someone would want to use an agent who has the ability to choose from as many options as possible, but Brandon notes that a ‘captive’ insurance broker isn’t the end all be all. He sees many good captive insurance brokers in his day-to-day business, as well as some not great independent brokers. Ultimately, he comes back to saying use someone that is trusted. That said, if you sit down with an insurance broker and they only have one choice, he recommends asking them why that is and if there could be anything else out there that may be better for you. Never be afraid to ask questions!
Lastly, we discussed the topic of life insurance fees. Both life insurance companies and life insurance brokers receive payments through the premiums paid on the policy. In the case of the life insurance company, the portion of the policy being taken out as fee vs. going towards the death benefit, paid out as commission, or put towards the dividend (in the case of permanent policies) can be pretty unclear. In the case of universal life insurance policies, this can be a bit clearer, but in general fees aren’t always very transparent.
It is important to note that most insurance brokers receive their pay through commissions. Therefore a broker’s compensation comes from the first year of the policy premium payments, and then usually from a small ‘trail’ for a set time after that first year. In my mind, this may create a scenario where brokers have a higher incentive to sell a product than to provide guidance during the lifetime of that product.
There has been some progress to change this pay structure, as has occurred in areas such as investment management and financial planning. Brandon notes, though, that life insurance policies that take a more long-term payout approach, similar to the ‘fee-only’ investment management approach, still are not very competitive. In his mind these policies are not used widely enough at this point, therefore the products do not have the scale yet for competitive pricing. He also noted that although individuals may think they are getting around a commission by buying a life insurance policy online, they are not. He indicated that in most cases, the payment structure for an insurance policy bought online is the same as from a broker, in the case of doing it online you are getting less advice with the purchase.
Wow, getting to the end of this post, I realize this was quite a lot of information – and somehow we only scratched the service of this complex topic. This reinforces Brandon’s parting piece of advice that I want to share with you all, which he reiterated quite a bit during our conversation. When it comes to buying life insurance – 1) Work with someone you trust, and 2) make time to properly plan your life insurance needs.
Trust and planning – music to my ears! We just might have to have Brandon back again soon…
Ps: If you haven’t checked this out, read up on this piece by my colleague, Barry Rings, Life Insurance … Common Mistakes
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