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Ralphs. Fresh for everyone. When you listen to each episode of Radical Personal Finance, do you come away thinking, "Man, I got at least 15 cents worth of value from that show?" If you do, then consider becoming a patron of the show at $3 a month. And in exchange for helping me with the show, I'll give you some additional benefits that you don't get just from listening for free.

One of those benefits is input into each day's show in advance. And today, as an example, you're going to hear several questions that came in from the audience that are specifically being answered in today's show because of the patrons. Details are at radicalpersonalfinance.com/patron. Today we dig into term life insurance.

And I promise, it's going to be fun, it's going to be interesting, and it's going to be useful to you. Don't buy term life insurance until you listen to this show. Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheets. Thank you for being here. This is going to be fun, and I hope that this show is extremely practical for you.

My intention is to give you the overview that you need to make a good decision with regard to term life insurance. I'm going to define some key terms and help you to navigate the maze so that you can get a good deal for yourself. Term life insurance is probably the most ubiquitous product in today's world, and that's a great thing because it's an awesome way to do life insurance.

And it's going to be the best fit for a large and I would say vast majority of life insurance needs. But very few people actually understand how to compare term life insurance beyond just simply seeing a quote and seeing something like 15-year level term insurance and a price. So I'm going to give you a little bit of the depth.

Some of the things that are actually written in the policies, and hopefully it will give you what you need to know to be able to make better decisions. If this is your first time listening to an episode of Radical Personal Finance, please note that this show is part of a longer-term life insurance series.

So we've gone back. We've talked about what is the use of life insurance in personal family context. We've talked about how to calculate an appropriate amount of life insurance. Now we're moving into how to select a policy with a specific focus on term life insurance. So let's start with the definition.

What is term life insurance? Very simply, term life insurance is life insurance that is in force for a specific term, a specific amount of time. And this is compared to life insurance, which is how it was traditionally known, which was in force for your entire life. Now we usually will refer to that as permanent life insurance.

Permanent life insurance could be any kind of life insurance policy that will last for your entire life, whether it's what's called whole life insurance or universal life insurance. Or you might hear term life insurance compared to whole life insurance. And we'll go into the different types, and that's what we're doing is little by little going through the different types of life insurance.

There are five in total, and those five types of life insurance are term, whole life, universal life, endowment, and annuities. And all of those are five distinct types of life insurance that we talk about. So today we're focusing in on term. The key thing that you need to be thinking about very clearly is term life insurance is useful for any need that you have for life insurance that is a specific – that is a need for a specific time period.

The need that is appropriate for you to cover with term life insurance must be temporary, and it must have an end date at which that need will go away. So some simple examples would be to cover a debt obligation that you have. I always like to – because it's very simple.

I like to think of let's say that you sign up for and you're going to buy a business from somebody. And the business owner – you're going to pay it out on a 10-year note. You're going to make payments for 10 years in purchasing out this business. The business owner would be wise to require you, the buyer, to maintain an amount of life insurance in force for 10 years so that he or she would have enough money so that if you died, they would still get the money from their business.

You could also apply this to if you have personal debt obligations, something like a mortgage. You have a 15-year mortgage. You know in 15 years that mortgage will be paid off and you can purchase life insurance that will be in force for 15 years. That's a wise use of term life insurance.

It could also be something like covering a young family and this is probably the most important, most popular use for life insurance. The idea here is when you have a young family, you have a specific amount of time during which you expect your kids to need your support. So in my case, I'm a young father, two kids.

It's likely that in about 20-ish years, if my wife and I don't have more kids, then it's likely that in about 20-ish years, most of my parental obligations to their support will be satisfied. And it's certainly likely that in about 15 years, they'll be mostly able to be on their own.

But it might not and that's the problem with term life insurance. But that's for another day. But the key thing is that's a good situation. Most of my life insurance that I own is term life insurance because over time, my obligations are going to reduce. Another one would be let's say that you are going through a period of financial hardship where there's a specific business – something happening in the business climate that's substantially affecting the value of your investments.

Well, it might be a good idea to go ahead and get in force some temporary life insurance to protect your family in case you die and you're not able to bring your business – the value of your business back up. So all of these are just different examples of the application of the first use of term life insurance that is useful for any life insurance need that is temporary and time-bound.

And anytime we have a short-term, temporary, time-bound need for insurance, we're almost always going to go for term life insurance. It's the best tool for the job. And it's an amazingly useful, inexpensive tool. It's an incredible tool in your tool belt as a financial planner. Now, the other need for – the other use of term life insurance is if you need cheap insurance premiums up front, even though you know that your insurance need is going to go on for longer.

So let's say that I know that I am going to need insurance for my entire lifetime for various purposes, but I can't afford the insurance right now. Well, then term life insurance is going to get you in the door. It's going to get the coverage put in place, and it's going to give time to be able to afford the higher premiums for the longer-term coverage.

Remember that term life insurance always simply protects you against the contingency of dying, the possibility of dying. It doesn't protect you against the certainty of dying, hopefully at a late and old age. But it protects you against the possibility of dying within a specific period of time. And that's why it's so cheap is because most term life insurance policies do not – thankfully, they do not wind up paying death benefits.

Rather, they simply cover against the contingency of dying within a specific amount of time. So anytime you have a financial planning need, whether it's in your own life or you're talking to somebody or you're giving them advice, if there's a specific, temporary, and time-bound need, look to term life insurance as your ideal way to do that.

It's your ideal way to do that at the lowest possible cost. Now, there are various policy designs. The vast majority of policies that are sold currently – and as I record this in May of 2015 – the vast majority of policies that are sold are known as what's called level term life insurance.

And these are very simple, very straightforward. They're usually for – the most common is for 10 years or 15 years or 20 years. Although you can purchase them for as short as five years, a level policy, or as much as I've seen, 35 years. Thirty years is becoming more popular.

But the primary ones are 10-, 15-, and 20-year amounts of time. And there's a real benefit to you if you're looking to purchase insurance here is because these are so popular, there's a real – it's heavy competition in this space and you can get great deals on life insurance, especially if you're young, on term life insurance, on level term policies that are very, very inexpensive.

That's the vast majority of policy designs that are covered, level term life insurance. It's as simple as it comes. You're going to buy a policy that's a 10-year level term life insurance policy for a million dollars. You're going to keep that policy for 10 years. At the end of 10 years, the coverage goes away.

If you didn't die, the insurance company keeps all of the premiums that you paid them. If you died within that 10-year period of time, the insurance company will pay out the death benefit, the million dollars, to your family. And that money – remember, always – life insurance death benefits always are received by the beneficiary income tax-free.

And that's the vast majority of policy designs that people are used to seeing is level term life insurance, level death benefit, level premiums for the specific amount of time. Simple and awesome, very, very useful. Another type that I am a major proponent of is, as we've discussed on the show, something called yearly renewable term.

You'll also hear it referred to as annual renewable term. You'll also hear it sometimes referred to as one-year term. These are all the same names for the same product. But what these are is these are policies that are renewable each year, guaranteed. You can renew them without the company taking the policy from you up through a certain age.

And the premiums go up just a little bit each year. Now, this used to be a much more popular approach to life insurance. Today, very few companies offer this type of insurance plan. And there are some that do, and I like the structure of this much better, especially for younger people, anybody under about the age of 40-ish.

I would always like them to look at annual renewable term insurance instead of level term insurance first. Anyone over 40-ish and that's not a hard and fast rule, I would always move in the direction of level term life insurance when there's a need for term life insurance. The problem is it's harder for people to find.

Most people aren't familiar with this type of coverage and many fewer companies are offering this than even offered it in the past. It also requires a little bit more of a learning process. And because we're not used to hearing the term, very few financial pundits ever even talk about it.

With details on this type of insurance, it needs to be done visually. So I've prepared a presentation on this for the patrons of the show. I can talk through this verbally, but it really is much more helpful when you can put the premiums side by side. Because the problem with annual renewable term insurance is that over the full length of amount of time, it's going to be more expensive than level term life insurance.

But it's still better to have it even though it might be more expensive because it keeps flexibility in your financial plan. So it's much easier for me if I demonstrate this with a visual presentation, demonstrating different premium levels and showing what the advantages and disadvantages are. It's hard for me to do in audio.

So I've prepared a video presentation on this for the patrons of the show. I'll release it on the Patreon page for you and also put it in the Facebook group for the irregulars. And you can feel free to view that video presentation where I'll go through with exact dollars and show exact current premium rates from a couple different companies to illustrate to you how you would analyze this decision.

And that will be available for you for patrons at any level. So if you're not a patron of the show, if you'd like to have access to that video presentation, go to RadicalPersonalFinance.com/patron. Become a patron. The minimum pledge amount is $1 a month. So become a patron of any amount.

A dollar a month is fine or higher levels are great. There's a bunch of extra benefits there for you and you'll gain access to that type of – that presentation. That will be much better than me going through and trying to describe it purely in audio. It's not a one-size-fits-all thing.

It's more of a nuanced approach. But I'll explain to you in that presentation why I – me personally, I don't own any level term insurance. All of my term insurance is annual renewable term life insurance. And that will be in that presentation for you. I haven't uploaded it yet.

That will go out within – by the end of next week. So by the middle of May, that will go out on the Patreon page for you. And if you're a patron, you'll receive notification of that. The next type of normal policy design, and these are not as often seen, is decreasing term life insurance.

And essentially the way this works is you start off with a death benefit amount. Let's say it's a million dollars and then it decreases according to a normal schedule. Most common application to this is mortgage insurance. When you buy a mortgage and you buy a policy that's just designed to pay off that mortgage, as your mortgage balance declines, the need for insurance is declining.

And so you can sell a policy into this space. And that policy amount can actually decline over time. There's nothing wrong with this except usually it's only offered by companies that are specializing in mortgage insurance. And when I've priced it in the past, in years of working as a life insurance agent, I never sold a single one of these policies.

It would be a benefit if you could find a well-priced product, but you generally can't. I generally have been able to get a better deal on a level term product because there's so much competition rather than a decreasing term insurance product. So there's nothing wrong with it conceptually, but price it carefully.

The other type of insurance you can buy is increasing term insurance. And the idea here is you're starting with a policy, let's say a million dollars, and then each year the policy benefit is going to go up. The primary thing to think of here is an inflation rider. So we're going to buy a million-dollar policy, and every year the policy is going to go up by 5 percent.

There's not really any problem with this design either except for the fact that if you're buying term life insurance, hopefully your reason for buying the insurance is going to be decreasing as time goes on. And it's going to be decreasing in just about any scenario that you're using term life insurance.

If you're paying off a loan, the loan balance is declining, so your need for insurance is declining. If you are covering your family in case of early death, the need for insurance is declining because each year that goes on you're working and you're supporting your family and you've got one less year to cover.

So the idea of needing increasing term life insurance, I can think of very few reasons for needing it except as a simple inflation option. The other reason I've never sold an increasing term insurance policy is that generally the cost for insurance is so cheap. Instead of putting that on as a rider, which is usually how it's applied, I'd usually just take that same money and buy a little bit more insurance up front and buy a slightly higher policy.

So there's always more room in the policy. Now, mathematically these can work out in different ways and you can run the numbers yourself. I just want to make you aware that those different policy designs are there. So those are the four major policy designs, level term, yearly renewable term, decreasing term, and increasing term.

And for most of you, the only one of those that you need is level term. For any of you who are younger, you need to look at level term and yearly renewable term and then you're aware of the other two. But let's talk about some of the actual features of a life insurance policy.

Usually people just think of it as, well, either I – and I die, my family gets money, and if I don't die, I lose the money. But there are some other key features that come into play. And the first one is the feature called renewability. Renewability is the right to renew your life insurance contract without having to take a medical exam.

And I'm going to throw at you a horrible little bit of insurance lingo. But it is terrible. I try to never use insurance lingo but I do want you to hear this one. The key is that you can keep your policy going on without evidence of insurability. That's the insurance lingo, evidence of insurability.

And the idea here is simply this. Remember that when people buy term life insurance, they're buying the insurance to cover a specific need that they think is going away. If they get to the end of the term – let's say you bought a 10-year term policy. If they get to the end of the term and they're still healthy and the need is gone, it's very unlikely that they're going to want to continue the coverage.

The insured person is just going to say, "I don't want to pay for this anymore. I'm going to cancel it and just go on about my life." But who would want to continue the coverage if you get to the end of the term? Well, there are a couple of different people that would.

The first is the person who continues to have a need for coverage and this happens a lot. We moved into the house. We took out a 15-year mortgage. We thought it was going to be paid off but what happened is we got a raise and we got a promotion and we moved across the country and we bought a bigger, fancier house and we're putting the kids in college and the stock market declined in the interim.

So we thought we weren't going to need any life insurance after 15 years. But now we've got a new 30-year mortgage. We've still got more debt and we're paying for the kids' college, so therefore we need more life insurance. This is the normal situation that most families get into.

Not you, hopefully, because you're a radical personal finance listener. But this is the situation that most people get into and there's nothing wrong with it. But the point is if someone has a continuing need after the 10 years is up, they're likely to want to continue their policy. But here's the other type of person that's likely to want to continue their policy, the person that was diagnosed with prostate cancer eight years into the 10-year contract.

That person is very likely to want to continue the policy. Now, if you think about this, this puts a big risk on the insurance company because if the only people that actually hold on to a life insurance contract are the people that are sick and likely to die, that wrecks their numbers.

That wrecks the underwriting rates. That wrecks the number of people across the normal population that are dying. And it really ruins their ability to accurately predict the rates for an insurance policy. So they've got to be careful about this. When you're looking at a term life insurance policy, the question you want to ask is, "Do I have the right to renew this policy without taking a medical exam?" Or again, using lingo, "Without presenting evidence of my insurability?" Oftentimes you'll see this, for example.

It's common sometimes you might have a 10-year level term life insurance policy that can be renewed for an additional 10 years. That's possible. This is when I say that annual renewable term life insurance, simply what that means is every year you can renew the policy for as long as you want up through the age that that benefit expires.

So each year you can simply renew the policy again and again. The key is you need to think about this renewability feature and you need to think about what's important to you in your situation. If the policy can't be renewed and you still want or need the coverage, you might be stuck without insurance.

You want to make sure that you don't get stuck without insurance just by circumstances happening to you. You want to make sure that you plan ahead, that you don't face that. Under the renewable option, if you look at the different policies, they'll say, well, for example, you can have the coverage for 10 years and then you can renew it for an additional 10 years and they'll give you the renewal rate.

Usually that renewal rate will be much – at a higher age and that higher amount – excuse me, not at a higher age. It will be at a higher amount because of the later age. That higher amount may just be a little bit higher or it might be a lot higher and that depends on the policy design.

The key thing to remember as is going to affect your cost of your term life insurance, the more generous the renewal privilege is, the more expensive the policy. The less generous the renewal privilege is, the cheaper. If you're buying and comparing two policies from the same company, one policy is for 10 years and you cannot renew it any longer than 10 years and the other policy is for 10 years and you can renew it for another 10 years, the policy that you can renew is going to be higher priced than the policy that you can't renew.

The reason for that is because the insurance company faces the risk of your renewing the product at the end of that time period and they have to price that in. So there's a factor of adverse selection that you're likely to renew it when you're 6. They have to plan that in and there's also the fact that you're having the policy for a longer period of time, for up to 20 years.

This might be completely fine or it might not be. So you need to look at your situation and understand. Take a look at your actual proposed contract and you'll see in there the renewal terms. Many times now what's fairly common in today's insurance marketplace is you might purchase a policy and this policy has – most of these policies are renewable and they will put a schedule of premiums.

It will say 20-year premium renewable – excuse me, insurance is renewable to age 95 with premiums that are level for 20 years. So if you look at the policy – the schedule of premiums on the – in the actual contract or in the proposed contract, you'll see that for 20 years, your premiums are level and those premiums are guaranteed.

And then after the 20 years, you can go ahead and keep the policy but the premiums will jump up substantially. That's the renewability option. So just take a look at that and you'll understand. That's renewability and it's a key feature for you to think about with regard to your individual situation.

The next key policy feature for you to consider is called convertibility. The right of convertibility is your right to exchange your term insurance contract for a permanent insurance policy without having to take a medical exam or to use insurance – let me go again – without having to present evidence of insurability.

This feature of convertibility guarantees your access to permanent insurance regardless of your loss of insurability. Remember that insurability can be lost for a couple of reasons or more than a couple. The first one that most people think about is something like health. You may receive – you may be diagnosed with cancer.

You might have a heart attack. You might have a stroke. You might get diabetes. Those are all going to dramatically impact your rates of life insurance. But there might also be what they call either occupation or avocation, meaning lifestyle choices. So you might choose to get a pilot's license.

The day you sign up and start taking private flying lessons, your premiums will increase dramatically and I mean incredibly dramatically. You may not even be able to be issued the policy by some companies. Each company would be different. But I worked with a guy one time. He was a professional pilot but he was also driving hang gliders.

His premium rates were multiple times what they should have been or what they were for people who weren't flying hang gliders. And he paid – he had to pay extra cost because he was a commercial pilot but he wasn't flying for a mainstream carrier. He was flying internationally and also because he was a hang gliding pilot, then his premiums increased hugely.

Or it might be something like you might ride in a rodeo. You might be a martial arts expert. You might be a race car driver. You might – there are many of these types of things that will dramatically affect the premium for your insurance. And so if your policy is not convertible, then you'll have to go in and apply afresh.

If you want a permanent life insurance policy, you'll have to go in and you'll have to apply for one. And you're going to be facing whatever the underwriting rating is at that point in time based upon your health and your hobbies and those types of things. So convertibility is a good way to guarantee your access to permanent insurance no matter what happens, even if you have a term policy.

So earlier when I mentioned that there are two roles for term life insurance, one is for a specific amount of time, a need that is specifically time-bounded and temporary. Or when you need permanent life insurance but you need cheap premiums up front, if that's the case, you're going to want to look at this right of convertibility.

It can be very useful. Usually policies are convertible for a certain period of time. What's most common, if you have a 15-year level term life insurance policy, you'll be able to convert it for the first 12 years of the policy. If you have a 20-year policy, you'll usually be able to convert it to the first 15 years.

If you have a policy that's enforced until, I don't know, age 70 or age 80, then you might be able to convert it before 60. That's another common type of feature. But the key is usually the policy will not be convertible until the end of its term, but it will be convertible until a few years before the end of its term.

Again, this is how the insurance company manages the risk of your keeping your term life insurance until the 9.5 year – I was going to say the 10th year, but just before the 10th year. Then going ahead at the last minute and converting over to a premium – excuse me, a permanent insurance plan knowing that you're going to die because you got diagnosed with prostate cancer.

That's how they protect themselves. So how does this impact the cost? Well, if you were comparing one policy that was convertible and one policy that's not convertible, the policy that is not convertible would be cheaper. Now, I don't – I've never seen a term life insurance policy that wasn't convertible because the insurance company has an incentive to offer this to you knowing that they'll be able to sell you back.

Knowing that they'll be able to sell you more permanent insurance in the future when you convert the policy. So rather let's look at it from the factor of how long is the conversion good for. The longer the period of conversion, the more expensive the policy. The shorter the period of conversion, the cheaper.

That can be applied across most aspects of the market. Now, this one is not quite so widely true, but I think it's just worth mentioning is at least my experience has been this. The more valuable the right of conversion with regard to how high-quality the company or how high-quality the permanent insurance products, the more expensive the term product.

The less valuable the right of conversion, the less expensive the term life insurance product. So if you're doing business with a company that is known for the quality of their permanent life insurance products, usually they can sell their term life insurance at a higher rate knowing that one of the primary reasons and ways that insurance is being used is as an entry ticket, a cheap down payment on the entry ticket into their permanent insurance products.

So that one is hard to measure, but I have experienced it to be true. That's why some of the AAA-rated carriers are often going to have more expensive term life insurance than just a single A-rated company. There are other reasons as well, but they can demand the price from the market because the demand is there for their term insurance as an entry ticket into their permanent life insurance programs.

The next policy feature that you want to look at is you want to consider what's called a disability waiver of premium. This might be useful for you to consider on a term life insurance policy, but you'll want to carefully read the contract. Here's the simple consumer-friendly way that this is often described.

When you have a life insurance contract, you can add this disability waiver of premium. And what it means is that if you are disabled, then your premiums will be waived. You won't have to make your life insurance premium payments anymore. The picture that I've often used to explain it is consider this.

You get your term life insurance and you are working, but then you're diagnosed with cancer. And you're not able to get work anymore because you just simply can't physically do it. You're spending all your time in the hospital bed. Assume that you plan poorly and you don't have any – either you plan poorly or just circumstances dictate that you weren't able to get any disability income insurance.

So you don't have any sources of income. You get fired from your job. You don't have any sources of income coming in to support yourself. You're living off of the help of friends and family who are helping you with – as they can financially. Well, when you're diagnosed with cancer, you really need your life insurance coverage to stay in force and it's hard to come up with the premium payments.

So therefore, you might run the risk of losing your life insurance. If you have the disability waiver of premium option on your policy, then you have the choice – excuse me. The insurance company will go ahead and pay the premiums when you're disabled. Now, that's how it's explained – how I use – how I actually explain it.

But you have to look at the cost of the feature and say, "Is this actually worth it?" And you have to look and say, "OK, practically speaking, is this going to be an important feature to me?" And my answer to that is it depends. So if you're just simply buying a cheap term life insurance policy, very simple and straightforward from a cheap term company, then this might not be very – a big deal to you.

I know that if my insurance premium were $10 a month and I went into the hospital and had cancer and I told any friend or family member, "Listen, can you do me a favor? I need to pay my life insurance bill because I got cancer now. Can you pay this for me?" They would pick up the $10 a month, $10 a month.

So to me, that's not a very big deal for them to actually pick up that cost. I don't need to pay a bunch of extra money to add the disability waiver premium. But if you start reading the contracts, what you'll see is that different companies will do things differently.

And what can happen is when you start to add these rights of renewability and convertibility onto each other and you start to read the definitions of disability, there can be a substantial reason to actually consider purchasing the disability waiver premium. I generally have very rarely if simply selling cheap level term life insurance to a client – I was going to say never – I never – yeah, correct.

Okay. I can't remember a single time where I've ever added a disability waiver premium. But if you are having a longer-term program of term life insurance or it's with a more expensive company where there's a more valuable option for it, then I almost always put it on there. It's on all of the policies in my family, all the policies that I own and all the policies in my family.

The reason for it is because depending on the company – read the contract – but depending on the company, sometimes the waiver of premium and the renewal privileges and the convertibility privileges can be stacked. So for example, on the term life insurance that I own, the life insurance is in force until the age of 80 if I want to keep paying the premiums.

The premiums beyond about the age of 50 get so expensive that unless I needed the policy desperately, I wouldn't continue the policy. But the insurance can be in force until the age of 80, and the insurance policies that I own are convertible until the age of 60. So anytime between now and age 60, if I need permanent life insurance for any reason or any more than I have, I can go ahead and convert the term life insurance without taking any medical exams, without answering any lifestyle questions.

I can just simply convert any or all of the term life insurance. The disability waiver of premium provides that if I'm totally disabled for a period of six months or more, then the insurance company will pay the term life insurance premiums, and they'll pay them as the rates go up in the future for as long as I'm disabled.

Once I'm not disabled, then the waiver won't – I'll have to pick up the premiums again. But the key would be the policy is still convertible, and if I'm disabled, the insurance company will pick up the premium payments on a permanent life insurance policy where the premiums might go from $1,000 a year to $10,000 a year.

For me, that's incredibly beneficial and useful, especially at a young age, knowing that I want to build in flexibility, knowing that I'm still building up my financial foundation. And so it's nice to know that if I were totally disabled – and there are different definitions of total disability, which we'll talk about when we get to disability income insurance.

But if I were totally disabled and unable to work, then at least I would have a substantial amount of life insurance that is being paid for by the insurance company, and that would provide me with permanent life insurance coverage and access to cash values to fund my future needs if I were disabled.

Now, not all companies provide that kind of benefit. There are a few who provide that kind of benefit, but you need to shop carefully and you need to read the contract and ask the agent very carefully. So those are the biggest, most important policy features that you'll want to consider that very few people consider when they're actually comparing policies.

And it's difficult without a deeper level knowledge and understanding of the marketplace. It's difficult to do those comparisons and to judge what's valuable, what's not valuable. Do I need the renewability? Do I not? Do I need – is it important to me that this policy be convertible or is it not?

Do I need this disability waiver premium? Is – when I actually read the contract, is this a good, useful version? All I can tell you is hopefully you can find an expert who can help you with that or just read the contract and think through your situation. Now, before we leave this section, I want to mention one very uncommon type of insurance, but some of you will run into it.

And then we're going to move on to figuring out what length of contract is appropriate and also talking about the return of premium rider because this is something that is important. And then we're going to go on to how to analyze the costs between companies and between insurance policies.

We're going to talk a little bit about term life insurance versus other types of life insurance as well. But let's – I want to briefly mention to you the concept of reentry term life insurance. Some – I haven't seen these very common, but I am aware that they exist.

And so some of you might run into this. In some level term policies, you'll see that you can continue the premiums at different rates whether you're willing to take a medical exam or not. This is called reentry term insurance. So the policy is renewable with a medical exam at a lower rate or it's renewable without a medical exam at a higher rate.

This one, I don't see it much in the marketplace. I'm not going to spend a lot of time on it. It's good for people who are healthy because then they can keep the policy going. It's not good if you're not. That's why I'm generally not in favor of it because if you're not healthy, that's when you really need those features.

If you're healthy, you can just go out in the marketplace and buy new insurance. If you're not healthy, that's when you need those features. So I'm always planning for the worst-case scenario, knowing that if everything is going great, we're healthy, we don't have any adverse risk selections, knowing that the entire marketplace is always available to us under those situations, but planning on the back end for what do we do if things go horribly wrong.

So let's talk about the length of the contract. How long of a contract should you choose? Let's say that you have the option of anywhere from five to 35 years of level term life insurance or you can get an annual renewable term policy up through a later age, age 70, age 75, age 80, depending.

Well, that goes back to your need. It's very hard to predict in the beginning. So look at – when you do your analysis, look at how long you're expecting your needs to go on and try to cover that amount of need with a little bit of wiggle room. Twenty years for many people, young families, young kids should be adequate.

But what often happens is people move in the direction of a 30-year term product instead because they want that extra wiggle room. The challenge is with term life insurance, if you are getting a level term policy, you're always overpaying in the beginning of the contract and then you're underpaying at the end of a contract.

That's simply because whenever you have level insurance premiums, that means the insurance company is taking a lower rate in the beginning, knowing that over time, the cost of your insurance is going to increase because you're getting older. The insurance company is taking a lower premium in the beginning, increasing that slightly, investing that difference to cover the back end.

Anytime you have level premiums, that's what's happening. So you're slightly overpaying in the beginning and then you're underpaying at the end. So you don't want to go too aggressive with this because if you bought a 30-year term product and then 15 years in, you didn't need coverage anymore, well, you wasted your money.

You should have bought the 15-year term product. This is again why for younger people, young families, I am such an adamant proponent of annual renewable term. You'll see that clearly in the video presentation where I can show you the actual premium costs. But you have to figure out in your situation what am I actually going to do.

So try to go with an amount of time – amount of term. This is as long as you think you're going to need. You may give yourself a little wiggle room but the key is if you can handle and figure out a way to solve that problem of renewability, then that will give you your option where you can continue it for longer if you need it and you're not overpaying in the beginning.

You can also do – I had a question here which I will answer as well. You can do something where you do something like similar to a laddered insurance policies. It would be what I would call them, laddered level term insurance policies. So simple example, you've decided you need $900,000 of insurance but you could do $300,000 of 10-year level term, $300,000 of 20-year level term and $300,000 of 30-year level term.

That can work but it's hard to know those exact numbers. So you've got to figure out your length of contract based upon what your length of need is and then match those two things up, knowing that the longer your contract, the more expensive and the shorter your contract, the cheaper.

Let's talk about now about the return of premium rider. This rider is kind of a unique option in the insurance business and a lot of people really love it and a lot of people really hate it. And what's interesting is that a lot of customers really love it and a lot of financial advisors really hate it.

Now, essentially the way this works is you pay an extra amount on top of your normal premiums and in exchange for that, when your insurance policy expires, you're guaranteed to receive all of the money that you paid in premiums back. So if you pay $1,000 a year for 20 years, you've paid a total of $20,000 of annual premiums and then if you die, the insurance company pays you the death benefit and they don't return your premiums.

But if you live to the end of 20 years, the insurance company pays your premiums back to you. What's essentially happening is the insurance company is taking a term life insurance policy, adding an additional amount of premium dollars which they can take and invest, and they're investing that money in a side fund with the goal of having it equal the total amount of premiums at the end of the term.

This works primarily for very long-term policies because you need the time for the side fund to be able to grow enough. The shortest policy that I'm aware of that you can get this on would be a 15-year level term insurance policy. I don't know of any companies offering it on a 10-year level term policy, although there are thousands of companies.

I wouldn't be surprised if somebody is, but I don't know of them. And the key is you want to actually calculate for yourself whether this is a good deal for you or not. You want to calculate the actual rate of return. This is fairly simple to do. What you do is you calculate out the total amount of premiums that you would pay if you don't have the return of premium option.

Then you calculate what the premium is with the return of premium option and the total premiums that you would pay. You use that final amount as your future value and then plug that into your financial calculator with your payments being the extra amount, the extra premium that you're paying in order to get the return of premium option.

So let me give you some examples here, and I've created a spreadsheet on this which I will release this spreadsheet for the patrons and also for – also for the patrons of the show and also in our Facebook group for discussion. I know that I'm not doing everything – just if you're a listener of the show and you're not a patron, I'm not doing everything necessarily just for patrons.

I'm trying to provide lots and lots of options for all of you, but I'm also trying to provide extra benefits for the patrons of the show. And specifically when I get into things like this which are comparing specific companies and specific prices, I would prefer that that not be publicly out there on the internet at this time.

I'd rather just discuss it in a private forum where I can discuss it with people that are not just random commenters. So if you'd like to have access to the actual spreadsheet, you'll see that on the Patreon page and you'll see it in the Facebook group for the irregulars of the show.

But here would be an example. I've quoted one company here. This is a well-known established company that has a 15-year level term insurance product. And the 15-year level term insurance product for a 30-year-old male, a million dollars of insurance, just a straight 15-year term is $535 of annual premiums.

And that would be in total if you live for 15 years and you don't die, then you're going to pay a total of $8,025 for the cost of your level term life insurance here. That's the cheapest – it's not the cheapest option you can get at that age, but it's the cheapest option with this company that also offers the return of premium rider.

The difference of premiums here is that if you were to go from the straight level term product without the return of premium over to the level term product with the return of premium, your annual premiums go from $535 to $2,623.50. Over the course of 15 years, that means that you've paid a total of $39,352.50 of premiums.

And at the end of the 15-year term, you would receive a check from the insurance company if you live for $39,352. Now, if you compare the total cost outlay, it's 8,000 – I'm going to simplify for easier listening. It's $8,000 versus $40,000 of total premiums over the course of 15 years, but you get the $40,000 back.

Now, what you need to do is you need to run the rates of return, and in this example, I've done that. And the rate of return that you're receiving on that extra money is 2.8% under this guaranteed contract with this large well-known company. I've also run this on a 20-year policy.

The difference here is a 20-year policy of just a straight level term insurance policy without the return of premium has an annual premium of $585, which let me hasten to point out to you, if you were to compare this as a 15-year versus a 20-year term for a 30-year-old male, $1 million, the difference between 535 and 585 per year is relatively negligible.

You're in a period of time at this age of extremely flat rates. There's not a massive increase in the risk of your dying between 45 and 50, and so that's why these policies are priced so low. So with this 30-year-old, I would almost always encourage them to go with the 20-year term instead of the 15-year term because, hey, when 50 bucks of an annual difference, what's the big deal as compared to the ability to have an extra five years in the back end?

You have to choose yourself. You would always get cheaper if you go shorter, but you run the risk of not being able to continue the policy. So back to the 20-year with return of premium versus not without return of premium, you've got a total of 585 without the return of premium versus just under $1,800 per year with the return of premium costs.

So there's an extra $1,200 per year of premium costs to have the return of premium. Over the course of 20 years, your out-of-pocket outlay is $11,700 without the return of premium versus $35,952 with the return of premium. But if you have the return of premium at the end, you get the total of $36,000 back.

That comes out to a 3.61% rate of return on that extra premium that you're paying into the policy. What about the 30-year term? Very simply, it's a difference of premium of $735 versus $1,496. So you pay an extra $761 for that return of premium each year, and your total out-of-pocket outlay over 30 years goes from $22,050 to $44,880.

But you get the $44,880 back for a 4.06% rate of return on your extra premiums. So you can see two factors. Number one is you are going to get a rate of return on your money with the return of premium, and it averages here at the short end with this company, 15 years, you got 2.8%, up to 3.61% at 20 years versus up to 4.06% rate of return on your money at 30 years.

So there is also a slight tax advantage to this option because that benefit, that money that you would receive is received income tax-free, and there's no annual taxation on that growth. So you would want to compare this to other tax-free options that you have. It would be similar, I guess, to municipal bonds.

If you're a municipal bond investor, in the same way that you calculate the tax-equivalent yield versus the taxable yield, you would need to turn this into a tax-equivalent yield at your tax rate to understand whether this is a good solution for you. In all the years of doing life insurance, I'll tell you this.

I've never sold a policy with return of premium. Consumers really like this sometimes, and they like it because we all like getting our money back. We like getting stuff for free. But the problem is return of premium, in my opinion, is not the best way to do it depending on how the company structures its contracts.

Some of these contracts are structured where you don't have any access to the money along the way. Some of these contracts are structured where there are some cash values that you can have along the way. But this only works for most companies – again, not all – but this only works for many of the companies if you keep the policy to maturity.

Many people don't. They don't keep their 20-year policy for a full 20 years. They keep it for 14, then they decide they don't need it anymore. Well, in that case, you've walked away from the return of – from having your premiums returned to you. Especially if you get into a longer-term policy where your rate of return is better, many times people don't keep those for the full amount of the time.

It doesn't work well on shorter policies, and this is my other issue with it. Term life insurance is the most ideal for very short-term life insurance policies. In fact, I'm not a huge fan of 30-year level term insurance because I think you just simply – it's too long of a period for term life insurance and you overpay so much in the beginning.

I really don't – I've sold a couple of policies to clients that specifically needed it. But I'm really not a fan. I would usually do a shorter amount of time for that because if you get out to 30 years, you want to start looking at a different structure than just a level term product and at least compare it and figure out if it's a useful option.

I also don't like this because it doesn't pay any additional money at death. So if you die, that money is gone. And the worst, that happens in other types of insurance too, but you don't have access to the cash and then the insurance runs out. So if you want to get your premiums back, here's what I've always done.

Instead of using a return of premium rider on a term policy, I would always recommend just buy the cheap term policy and supplement it with a small whole life policy. Then you have the best of all the worlds. You have your insurance. You have access to the cash values along the way.

And you aren't forced to take the cash out at the end of the period of term. You don't get the 20 years and you may or may not have use for the $45,000 at the end – or for the – yeah, for the $36,000 at the end of 20 years.

If you don't have use for it, you should just keep it in the policy, which if you have a whole life policy, it allows you to do that. Whereas with the term policy, it's going to kick the money out to you and you may not – you may have to go and reinvest it at that point in time.

So I would rather use a term policy and then supplement it with a small whole life policy. And then additionally, you can keep the insurance policy on a whole life policy forever if you need it. So again, you have the option of either taking the cash value or continuing it.

So I'm not a fan of return of premium options on term life insurance. I've always either done this with a – if you want it, you can either just get the cheap term policy or if you want it, use a small whole life policy instead. Or if you're very careful, you can use a universal life insurance product.

And we're going to need to spend a lot of time on universal life insurance when we get to that. It can be very flexible, which is the benefit of it. And when you get out to these very long periods of term, you get into a situation where universal life insurance can be a really useful in-between option where you get additional benefits due to the flexibility of being able to extend the policy instead of being forced out of a term policy.

But you get some other things that you got to be careful of. And most universal life insurance products get underfunded. But I like the flexibility of it instead of a term policy with a return of premium rider. But my big beef with return of premium options is I just don't like the conflict of interest.

Whole life insurance is complicated. There are a lot of moving parts. And sometimes it's tough for both novice insurance agents and novice buyers who are not accustomed to dealing with complex financial products to feel super comfortable feeling like they understand things like whole life insurance. The problem is that people in general love the cash components of whole life insurance.

People love getting their money back. I've played a game with many people over the years. I always required and required is in air quotes. But I always required people. I said when we talk about insurance, I'm going to present to you different options. You need to understand how these products work.

I played a little game of anytime somebody was an ardent I only invest in term insurance person or an ardent buy term invest the difference person. I always said, listen. I'm going to do a 10-minute presentation and I'm going to explain to you how a whole life insurance contract works.

And then you make up your mind. And the reason I always did this is because I made the mistake of myself being a vehement I only buy term life insurance person. And I never saw a whole life insurance contract. I was just going based upon what experts told me and I never understood how it worked.

Now, in the years of doing that, what I've often found is I've never – probably one or two. I've almost never found somebody who would get to the end of that presentation and would say, man, that's just a bad – that's a bad deal. Because based upon the way that you present it, you can either make insurance shine or you can make it not shine.

And so I could present both sides of the presentations the way that they're done. I could present the buy term invest the difference presentation and I could present the buy the whole life insurance presentation. And very few people would be able to know where the problems are in either of those arguments.

But when you start showing people that you get cash values or you get all your money returned, that does something in us and we want that. And people come out loving the product. My issue is that the return of premium only gets them the return of their money. And so, yes, the insurance is so-called free, but that's only free because people don't usually think in terms of opportunity costs.

And so they don't see the actual problem with the approach because they're not accustomed to thinking about what's my alternative use of the dollar? What else could I do with this money? The other thing about return of premium life insurance is it plays on what's common in our culture, which is term insurance only marketing.

Whole life insurance products are culturally despised. You want to be called stupid, just put on Facebook, "Just bought whole life insurance today," and all of your well-knowledgeable, well-knowing friends will quickly tell you what an idiot you are. So here sometimes I have seen that we get – sometimes some agents will play on the term insurance only marketing but still play to the benefits of the cash values.

And I don't think that's straightforward. I don't think it's ethical and I don't like that approach myself. I don't think we should despise certain financial products just because of the name. We should understand those financial products and then choose whichever product is appropriate to an individual situation. So I don't like kind of running with the tide of here's what's culturally popular.

There are a lot of problems to have with different types of insurance approaches, but we don't have to just run with the tide and jump on the term insurance bandwagon. But look, you get the cash values and most of the times people don't have a clue what they bought.

And then the other conflict of interest here is return of premium increases the premiums substantially on the cost of a term life insurance policy. But the premiums are still cheap enough that many people will easily do it. This is my same issue that I have with universal life insurance is oftentimes universal life insurance policies are underfunded, which can – the conflict of interest, not all agents but I believe some.

The conflict of interest here is you're increasing the premiums to a certain amount, but you're not increasing them to the ideal amount to have the policy properly funded for a lifetime. You're just taking a higher premium for a higher commission rate. It's tough to – if the client needs $10,000 of annual premium, but they're balking at the $10,000 number and you've got a difference between the $10,000 number, which is the really beautiful traditional whole life insurance policy.

Very expensive up front but really works. It's guaranteed. It's effective. And $1,000 a year is the term life insurance product. But you say you can get – for $5,000 a year, you can get all these benefits at the cash value, but without having to pay the $10,000. Many people jump at that.

And then the problem is that another agent has to come along 24 years later and the policy is blowing up because it was underfunded because the policy needed $10,000 of premiums put into it. And the client was putting in $5,000 and no individual person remembers 24 years later what the warnings were that the insurance agent gave.

And this is why people – their policies are blowing up and then someone else, which has been me, has to come along and give them the bad news that I'm sorry, but this policy is not going to be able to be maintained without a massive influx of additional premiums and we've got to figure out how to make the best of a bad situation.

In my mind, it goes back to this conflict of interest of a little bit higher, a little bit of benefit, but not as high as needs to be for the right benefit where the policy is going to be the ideal benefit. I'm not saying there's no place for return of premium term.

I've never sold it. I wouldn't buy it. I would rather have a term policy with a companion permanent policy if I'm going to choose to spend the extra money on the premiums. If you'd like to compare the numbers and you're a patron of the show, look on the Patreon page or if you're an irregular, we'll discuss this in the Facebook group and you can take a look at the spreadsheet that I've used for this show and we can talk about it further.

Next, we go on to group term insurance and specifically here, just a very short commentary on group term insurance from the perspective of the employee. Be careful when relying only on group term life insurance for your insurance needs. The insurance will go away when your job goes away. Your job might go away because you're rich and you don't need insurance anymore and you are retiring.

Your job might go away because your company went into bankruptcy and you're forced out on the street. And the risk that you always face is what do I do? That was always the risk. We're used to thinking about it in terms of health insurance back before the passage of the Affordable Care Act in the United States where with regard to health insurance, you needed to avoid the preexisting conditions.

We have the same thing with life insurance and there's no political benefit to changing those rules. So don't expect them to change. The problem is you've got to make sure that you don't get put in a situation where you've got bad health and need life insurance. And one way that happens is if you rely only on term life insurance, then you leave that job and something has happened to your health.

I can think of very few reasons why you wouldn't first purchase an individual term life insurance policy for yourself. It will usually be better coverage. It will often be cheaper and it will usually – then it's not connected to your job. Now, another day we'll do details on group term life insurance.

We'll talk about tax benefits. There are only a very few. Then we'll talk about the benefits of using this as an incentive program for employees. You probably don't have this. There are a few firms that do but most of you listening will not have anything other than just the ability to sign up and get some cheap term life insurance from your job.

So the key here is just be careful when relying only on group term life insurance. How do you analyze costs among insurance policies? Well, in some ways, this is good because term insurance is basically a commodity in much of the market today. It's one of the easiest types of policies to actually compare based upon cost.

There's a lot of standardization. You'll see 10-, 15- and 20-year level term products everywhere. There are a bunch of companies that compete heavily in this marketplace. If you take out all the riders, you take out all of the riders that I went over and the disability waiver premium rider and the return of premium rider and all that, you can get a pretty straight direct comparison between many of these companies.

There's not much of a difference. As long as the company is reasonably financially secure, which I'll talk about company in just a few minutes, as long as the company is A-rated and is reasonably financially secure, there's little reason not to just go with the cheapest company if you're just getting a cheap straight up 15-year level term policy.

You're not going to get any of the disability waiver premium. You're not going to get any of the other options. You need to carefully consider the value of those other options. But unless you have an insurance agent that's knowledgeable, that can help you with your situation, I wouldn't expect most of you to be able to weed through 10 different companies and try to read their renewability clauses and figure out which one is best.

So if you don't have a good insurance agent that you're working with as an individual, as an individual advisor and consultant, then there's no problem with just simply going with what's the cheapest. But just remember these simple rules to figure out your costs. The longer the term, the more expensive.

So anytime you go up in the amount of years of coverage, you go from 10 to 15 or from 15 to 20 or from 20 to 25 or from 25 to 30, anytime you increase the amount of the term, it's going to be more expensive. Anytime you decrease the amount of the term, it's going to be cheaper.

Make sure it's long enough but don't buy something that's too long for what you need. Now, there's a corollary of this. The longer the renewal privilege, the more expensive the policy. And the reason this is a corollary is because what a renewal privilege does, what the renewability clause does is it allows you to extend the term of the policy.

So therefore, it's going to cost more money. So the longer the renewal privilege, the more expensive, the shorter the renewal privilege, the cheaper. This might be a better way if you think you're okay with 10 years of coverage but you want to have the option of another 10 years.

That's why these renewal privileges are important. You're going to go ahead and you're going to buy a policy. You might be better off buying a 10-year policy that's renewable for 10 years. And that way, you have the option and you're not stuck if you need the policy for longer than 10 years versus buying the 20-year policy and paying a higher premium all along the way.

But you'll need to compare numbers for your situation. It's different at age 20. It's very different at age 20 or age 30 than it is at age 50 because there's a massive difference in the way the premium charts work at a later age. The next corollary is that the longer the conversion privilege, the more expensive the policy.

Again, why? Because when you can convert the policy from a term product into a permanent product, you're extending the amount of time that you can get coverage. And so that's going to cost you more. The shorter the conversion privilege or the nonexistent the conversion privilege, it's going to be cheaper.

And then there's almost that little tiny subset of that. The more valuable the conversion privilege, the more expensive the policy. The less valuable the conversion privilege, the cheaper the policy. The other thing that affects your cost is simply this. The more valuable the additional benefits, the more expensive. The big one there is the waiver of premium option.

Some policies – and I feel like maybe I didn't do a complete enough job with it. But some policies only waive the premiums on a cheap term policy for 10 years. That's not going to cost much and it's not very valuable. But a policy that offers the waiver of premium like I described where it will convert it and it will pay the premium on a permanent insurance product, that's going to be much more valuable.

It's also going to cost more. So you've got to consider whether that's important to you. If you understand those options, then you'll be able to compare among those different products that are standardized. The only one that I'm not covering here again is annual renewable term versus level term. Look at the video on that and I'll explain it in detail on that video where you can actually see the chart with the premiums charted so you can understand.

So let's talk and finish with the benefits of term insurance and I'm going to answer a couple of questions of specific application questions to individual situations. And we'll talk about how to find a policy. I've said that the benefits of term insurance that you should always use term insurance whenever your need for insurance is temporary and time bound and/or when the need is permanent but the cash flow is currently low or you can't afford the premiums for the policy that you actually need.

What about those who argue that term insurance is always the only appropriate solution? I want to mention this here in brief without going into detail on all of the arguments back and forth on this issue. At some point, I'll do a standalone show on it, on the merits and demerits of term insurance versus whole life insurance, etc.

But for today, I just want to simply say that I understand the frustration with the insurance industry. I'm frustrated with the insurance industry and there's a lot of really bad sales practices that have happened over the years that have led to insurance agents having a bad reputation. But there's also a lot of really good stuff that's happened in the insurance industry by many caring, competent, very highly qualified and skilled agents.

And sometimes life insurance agents have a different perspective than other people do. And so I'm not necessarily going to say that you're foolish for only thinking that term life insurance is the only appropriate solution. It's definitely the most appropriate solution in many situations including all situations in which the need for insurance is temporary and short-lived.

But it's not the only appropriate solution for all insurance needs. A couple of quick points. When you listen to this debate, the arguments usually will come into two different levels. And there are various subsets of these arguments, but you can basically wrap them all up into two different things.

Number one, the number one major argument against the use of non-term life insurance products. So the number one argument against whole life – we'll stick with that – the argument against whole life insurance is that level premium permanent whole life insurance policies overcharge the policy owner. That's the first thing.

The critique is that term insurance is cheaper. You should buy term insurance because if you die, you'll have paid less money. And level premium policies overcharge the – level premium permanent policies overcharge the policy owner. The second argument is that you should always separate your investing and your insurance.

Or if we're going to be technical, that the accumulation elements of a policy and the protection elements of a policy should be separated. So you should have your insurance in one place and you should do your investing differently. So let's talk about these two different things very briefly. Number one, what about the allegation that level premium permanent life insurance policies overcharge?

Well, it is absolutely true that if you know you're going to die and you have a choice between buying term insurance and permanent insurance and you die soon after buying the policy, you would always have been better off with the term life insurance. That's absolutely true as far as the numbers.

Pretend your term life insurance policy costs you $1,000 a year and your permanent life insurance policy costs you $10,000 a year. The argument is you should always start with the term insurance policy because it's going to be cheaper and you should just buy what you need when you need.

Well, that's true if you guess right and you die young. If that's the case, you guess right and you die young, then you're better off with term insurance. But if you guess wrong and you die as an old person, then you're sunk because you can't afford the premiums. If you actually stretch a policy out over your entire lifetime and each year you buy term life insurance in one-year increments, you will pay more for that policy than you will for the permanent life insurance policy if you maintain them for the same amount of time.

Remember that geometric curve of insurance going up. It's always going to get more expensive. And so given the fact that most people will not die young and most people will live to an old age and very few people want to bet on their dying young, you've got to separate and recognize that if you're going to keep insurance in force for a long period of time, especially into old age, you're going to be better off with permanent life insurance than with term life insurance.

But also recognize that the need for insurance is not going to be the same throughout all of age. So there's a need for both of these products, and that's why I've harped so much on distinguishing what is the actual need. When I'm young and I need to cover my family, term insurance is the solution.

But if there's a need that goes beyond that, we need something different. The other kind of subset of this argument that's often made is that if you buy whole life insurance and you're building up cash values and then you die, the company keeps your money, but you don't get the money back.

And this one irritates me because it's a completely specious argument. It's incredibly attractive as an argument because it's incredibly compelling because it focuses on our sense of justice. I've been putting money into this policy and I have cash values that are mine if I'm building it up in a whole life insurance contract.

I'm putting money there. This money belongs to me. I can cash the policy and take it. But if I die, the company keeps it and they only pay me the death benefit. That preys on our sense of justice. The company keeps your money. It's your money. It's your cash values.

But it's a completely fallacious argument here is because – and here's why. The entire basis of a level premium whole life insurance plan is based upon the concept of diminishing risk for the insurance company. To illustrate this, let me give you an example. Pretend that you're going to come to me as an insurance company and you're going to buy a $100,000 life insurance policy.

Excuse me. Pretend that you have already purchased and you've owned for the last 40 years a $100,000 life insurance policy. And now you're turning 90 years old and you have $90,000 of cash value in the policy on your 90th birthday. Now you've been paying me a steady level premium for many years.

How much do you have to pay me at the age of 90 to have your $100,000 policy? Well, if you're only on the risk – if I'm only on the risk for $10,000, it's a very small number. And because you've been paying in for years, practically by your 90th birthday, you may not even have to pay anything.

But it's a very, very small number. But how much would you have to pay me if I'm going to give you $100,000 plus your $90,000 of cash value? What happens is now you are trying to get basically a new term policy every year that covers the cash value. So if I've got to pay you out the $100,000 death benefit plus the $90,000 of cash value, you're going to have to pay me something close to $90,000 because you're 90 years old.

So the whole structure of a permanent level death benefit – excuse me, a level premium policy is based upon diminishing risks for the insurance company. The fact that there's a reserve fund that's built up so that when you die at 95 years old and they have to pay the $100,000, they built up the funds to do it.

That's why you can't get – you can't afford term life insurance in your 90s. And it's actually very fair because knowing that these cash values are building up, those cash values are returned to you in the policy as cash values if you don't keep it until death. So at 90 years old, you want to release me from the contract.

You get the $90,000 of cash values. That's how it works. I know I'm risking not making a compelling argument here because I'm just briefly touching on these examples. I just want to include it here in case you only listen to a term life insurance thing to cause you to think and we'll do a whole other episode where I go into these things in detail.

But those are two components of the argument that level – permanent life insurance overcharges you for insurance. It doesn't. It charges you appropriately for a plan of insurance that will be in force when you die. Now the second – again, second allegation is basically you should always keep your investing separate from your insurance.

This one is also maddening to me because it's another specious argument. It's not that that might not be true. You might want to invest separately from your insurance policy or you might not. But what frustrates me about the way this one is done is because the comparisons between investment options are never done accurately.

The most common representation of this argument is you say, "Well, I'm going to invest and I'm going to buy a whole life insurance policy and I'm going to guess it's going to give me a 4 percent rate of return," or I can go and invest my money into a stock index fund and get a 10 percent rate of return.

So usually that's the type of analysis that's made. So therefore you're better off buying term insurance and investing the difference of 5 percent – 4 percent versus 10 percent. And mathematically that will 100 percent of the time always be true if that's what you actually experience with your investment options.

So if your option is to invest and receive 4 percent in a life insurance policy or you're guaranteed 10 percent in your stock index fund, then yes, the stocks will always win. But that comparison is dumb because that's like trying to compare the gas mileage of a Ford F-350 to a Honda Civic and make your exclusive point of comparison gas mileage.

If you're only looking at the EPA recommended – or EPA estimates of fuel mileage and you're only making your decision based upon the EPA estimates, then yes, you would always choose the Honda Civic. But if you're actually stepping back and you're looking at the attributes of each vehicle and are trying to understand what your needs are and what you're trying to actually accomplish, then sometimes you might choose the Honda Civic and sometimes you might choose the Ford F-350.

They do different things. So the problem is here when you're actually investing and running an investment portfolio, you want to compare that based upon three primary considerations – safety of principle, the overall yield of the portfolio, and the liquidity of the investment option. When you compare a portfolio on those three things, safety of principle, total yield, and the liquidity of the investments, you cannot take a stock portfolio and compare it to a traditional portfolio-based whole life insurance policy because they're radically different.

When you look at the safety of principle, the insurance policy is invested purely for the safety of principle so that the insurance company can manage their claims. The overall yield, insurance companies are tremendously great investors. They're tremendous and they're investing hundreds of millions or even over a billion dollars in portfolios sometimes, and they've got tremendous options, and the yield that they earn on their portfolios is tremendous.

And when you go out and try to do it and replicate it on your own, that's a tough thing to do. It's very tough to do, but you've got to keep in mind the actual safety of the investments, and it's nothing like investing in an index fund as far as safety of principle.

So you look at safety of principle, yield, and then the liquidity of the insurance contract as compared to the liquidity of other options. They're very, very different. Now, every investment needs to be compared along these different attributes, and you should not only choose investments that meet certain things. For me, I am not using life insurance, permanent life insurance policies as a primary form of wealth building.

That is not a great form of long-term wealth building if that's the entirety of what I'm doing. I'm much better off focusing most of my time on my income potential, especially as relates to privately owned businesses, because the long-term yield on that will blow stock investing out of the water.

But the safety of principle is going to be much different, and the liquidity of my owning a private business is much lower than the liquidity of me being able to go and invest in a stock. Then again, also being young, it's much better for me to use long-term stock growth as the basis of wealth because overall over the long term, the yield should be much higher.

Even if the short-term safety of principle is not quite so great and even if the liquidity is not so great, the long-term yield is what I'm looking for over the long term. But that doesn't mean that there's no use in either my situation or anybody's situation for financial products that deliver guaranteed safety of principle, relatively high yield when adjusted for the risk, and extremely liquid options.

Then when you get into other potential benefits of being forced to save money, that can be a benefit or a drawback depending on your situation, and also the benefits of tax deferral in insurance contracts, then you get into a difference – then you're able to compare it. You also, of course, need to very carefully analyze the cost of any company and the cost of an insurance policy.

My point is that you need to think about life insurance. The reason I'm venturing just to mention that for about – what was it? – 10 or 15 minutes is simply that you need to think about the overall plan and what your goals are and let those goals dictate which financial products you choose rather than having an idea of a certain financial product always being the appropriate solution.

If you start with what you're trying to accomplish and then you go to the cupboard and see what financial products are hanging there and you hold up your sheet of goals of – that's what we do as financial planners. We make a sheet of goals. Here are the things that are important to us, and we're trading off between all these different options.

Should we put money in the 401(k) or should we put money into a 529? Should we put money into savings? Should we switch jobs? It's all – everything is a tradeoff, and at different points and different situations, different decisions will be right. But if you start with that, here are my goals, then go and say what type of financial products or tools are going to help me – get me closest to those goals, then you'll make good decisions.

Last question that I want to mention and then I'm going to answer some patron questions is how do you actually find a life insurance policy that's appropriate for what you need? Well, I struggle with knowing how to answer this for you. I really do. If I were still writing insurance policies, I would say call me.

Unfortunately, I left that business to be able to do this, and one of the reasons was I never found anybody doing what I'm doing today, taking the time to describe things and actually discuss the advantages, drawbacks, different aspects of how to look at a different decision, the things that a good insurance agent does in every single transaction.

The problem is many people either don't have a good insurance agent or they don't know how to know whether the insurance agent they have is good or they're uncomfortable with the prospect of talking to an insurance agent or various things. I don't know of a better way to get a policy than to work with a good life insurance agent.

The important thing for you to recognize is you will not – in the United States, different in other countries, but in the United States, you will not save any money on your insurance policy by working with one agent versus another company or working with this firm instead of that firm instead of the other.

The insurance companies, the way that it works in the United States is all the companies pay – or excuse me, charge exactly the same premium to somebody who is applying for insurance based upon their health rating. So they all pay exactly the same premium. So whether you use whatever online terminsurance.com website you are seeing on your TV cable news channel advertisements or whether you're working with your neighbor that approached you across the back fence and said, "Hey, I do life insurance," or whether you're working with your financial advisor who also holds a life insurance agent or whether you're working with your bank and there's a life insurance agent in there, the price – if you're working with company A and all five of those people are representing company B, you're going to pay the same premium.

If all of those people are representing company A, the price is the same. All of those people are compensated based upon commission. So the benefit to you is if you can get personalized service and personalized help from someone who can actually look at your situation and give you some advice, that's going to be in your best benefit.

Now obviously not everybody who's going to give you advice is going to be the same level of competence. Competence is built over time and thankfully – I mean there's not much – anyone who's gone through an insurance licensing class is probably okay to help you figure out a term insurance policy.

If you're trying to plan a celebrity's estate and you're looking at $400 million of second-to-die life insurance, you probably should look at an expert and you probably should find someone who's very, very experienced. But the best advice I would give you is work with an individual agent. Now you can also work with companies.

I've been trying to figure out an option for you all to be able to offer. Yesterday, I spent a bunch of time with – I've talked to several people in South Florida to potentially partner with, tried to figure out do I need to start an insurance agency again to help people.

I've talked with – there's a listener of the show that has reached out to me and said, "Well, maybe we could set something up." So I'm thinking through different options to try to help because there's a real – I perceive a real need in the marketplace, a difference between the life insurance agent who is just an expert and working one-on-one with people and has access to dozens of companies and can bring all those things into play.

And the kind of what I call the phone monkeys that are advertising on cable news where it's just somebody who has been given a script and, OK, we always sell 15-year-level term insurance and here are the questions you need to ask. I perceive a need for somewhere in the middle of those, but I don't know how to meet that.

So I've been trying to find somebody who can meet that. If any of you listening are insurance agents or have an insurance agency, something like that, that you have ideas, email me, Joshua at Radical Personal Finance. I've been trying to find an option, somebody that I can endorse to offer to you because it's a real problem for me to know how to recommend to you how to find a policy.

So just wanted to answer that. Hopefully, it's a good starting point. A couple of questions that have come in from patrons of the show and I'm going to buzz through these, but hopefully, they will be helpful to you. Number one question, how important is the financial strength of term life insurance companies?

My answer is somewhat important but really not very. There are plenty of – the best just cheap term life insurance companies are just going to be A-rated. The key to remember when you get into financial ratings, there's all kinds of different levels of financial ratings. The worst rating is usually C.

So companies, there's almost no one that gives people Fs. So there's AAA and then there's AA and then there's A-rated or A-plus or A-plus plus plus or whatever. There are a number of companies that are AAA-rated and very highly that are leading industry giants. But when you come to term insurance, it depends.

If you're just going to have term insurance, you don't need to convert it. I think any company that's A-rated is going to be perfectly fine. These financial promises are relatively short-term. 20 years is a relatively short amount of time in the context of a life insurance company. Many companies are 100 years old, 150 years old.

Some are almost 200 years old. So the idea of a company blowing up and withering away in 10 or 15 years is pretty unusual. In general, the insurance industry is very good about paying death benefits. I'm sure I've heard somewhere but I've almost never heard a complaint about insurance companies saying, "We're contesting this death benefit." If an insurance company is contesting a death benefit, there's a very good reason for it.

All insurance companies that are admitted in your state pay into a state guarantee association. And so if a company goes bankrupt on term insurance, remember you're not dealing with cash values. On term insurance, you're just dealing with a death benefit. So if your company goes bankrupt, the state guarantee association will step in and pay out the death benefit.

So as long as it's basically an A-rated company and it's a mainstream name, that will be fine. Now, if you get into other aspects of insurance that's not term insurance, that answer changes dramatically. So we'll talk about that when we get to talking about whole life insurance and universal life insurance.

But for term life insurance only, the financial strength is not a huge deal as far as there's not much risk of the company going away. Next question says – from a patron – says this. "One of the questions as a coordinator I get in my FPU," that stands for Financial Peace University.

That's Dave Ramsey's program. "One of the questions I get as a coordinator in my FPU class around term life insurance is what options do you have when you have a medical condition that makes term life insurance very expensive? My only suggestions that I can offer have been, number one, try to get life insurance through your employer if they offer a guaranteed minimum.

Number two, look for discounts from any trade organization that you might belong to. Number three, never give up any current policies when there's a risk that you won't be able to renew. Number four, suck it up. It's worth the cost to protect your dependents. What are your thoughts?" So my thoughts are those are the options basically that you have.

One of the situations that you're primarily going to be talking about here is somebody who's in Dave Ramsey's class. They're going to be following his advice to get eight to ten times their income of term life insurance. He's going to recommend 10 or 15-year level term insurance. What they're going to – and you find, "Wait a second.

I can't really get it." My options would be to start before you get to trying to find where to get it. Start with do you need it? Instead of just going with the blanket recommendation of eight to ten times your income of term life insurance, I would start with doing an actual needs analysis and trying to figure out why do you need life insurance and then how much do you actually need.

Sometimes that will mean the person winds up needing 20 times their income of term life insurance. Sometimes it will mean they need three times their income of term life insurance. But do an actual needs analysis so you can get an actual number and it might come out to be smaller.

Most often, the people that have medical conditions are going to be older and they're probably not going to need ten times their life insurance especially if they have other assets or things built up. So start with doing an actual needs analysis. Next, do try to get insurance through your employer and sometimes that will be what's called guaranteed issue where they've got to give it to you and you just sign up for it.

Or they might have an option that's just called simplified underwriting where you just answer a few questions instead of dozens and dozens of health questions. That might be a good solution for you. As far as discounts from a trade organization, that can help. But in general, those policies are still going to be underwritten for the most part.

But you do want to look to see if there is any kind of trade association that you can just sign up for and just do it, again, on a simplified underwriting basis. As far as giving up – never giving up the current policies when there's a risk you won't be able to renew, that's exactly a good key and that's exactly the problem with term life insurance.

That's exactly the problem with Dave's advice is if you've bought a 10-year level term insurance policy and then you've run into a health insurance issue, unless that policy was renewable for a greater period of time, you're going to be kicked out of that policy. So that's my fundamental issue with that type of advice, with these blanket overreaching statements is there is the risk that you won't be able to renew.

My only other pieces of advice is to work with a specialist and find somebody who is an expert in your area. There is an entire field of underwriting where you get into what's called impaired risk underwriting and it's a real area of expertise. I'm going to bring somebody on the show that's a friend of mine who is a broker in this area and is somebody that I worked with for years who is an expert at placing cases where they are impaired risk.

This is one of those areas where it pays to shop around with somebody who is expert and who is knowledgeable and not just call into somebody on a phone bank because somebody on a phone bank is not going to know how to deal with different medical conditions. My other answer to your question is if you get to the situation, I don't necessarily – I wouldn't necessarily agree with your final recommendation of simply suck it up.

It's worth the cost. It might be and so if there's a slight additional amount, it might be. But you need to actually run a cost-benefit analysis and say, "Is this worth it?" I don't think you should just pay insurance premiums if the premiums are crazy high. So for example, I've looked at a time.

There's something called the final expense insurance industry where you get these small policies that are for final expenses. But you sit down and run the math on it. You're like, "This is a waste of money. This is a waste of time." So what I would look at is I would look and say, "If you can't get insurance, let's just pretend you can't get insurance because sometimes it's not just that it's more expensive." Then what do you do?

Well, you go through and you lower the risk in case if you're dying. So here's what I mean. You sit down and look at the assets and you figure out which of these assets are going to continue on and you carefully title the assets properly so that if the risk is that I die and if I have credit card debt, then I want to make sure that credit card debt is only in my name.

Let's use an example that might work in a Financial Peace University class. So let's say that I die and I've got $100,000 of credit card debt. Well, let's go ahead and disconnect the house and let's put the house in my wife's name and she can have the mortgage payment because that's a secured asset tied to that and that mortgage would be in her name.

Let's get us disconnected and let's try to do some careful titling of the accounts to lower the risk of creditors coming and making claims against my estate and making claims against her. So if someone has heavy debt, that would be something that you could help them with is proper titling of accounts to lower the overall risk.

Now, unfortunately, most of the people who are in the situation where that's most applicable are probably not going to be doing this type of proactive planning. But just – that's what I would do is I would sit down and kind of do basically a little bit of pre-bankruptcy planning and figure out, okay, is there a way that we can structure things in the most intelligent way?

If you do that, sometimes you can diminish the risks for the needs of life insurance to a point where you're comfortable taking the risk. Two other questions here. What about layering policies? Joshua, what are your thoughts on layering policies of annual renewable term or a mix? So for example, I might need $5 million if I died.

But as I pay off debt and work toward financial independence, I might need only $3 million in 10 years and $1 million in 20 years. Should I get a 30-year, a 20-year, and a 10-year policy and layer them with different companies? Should one be annual renewable and then when the premiums get crazy, should I abandon it?

So the answer here is you can do that, but it depends on your age. If you're young, I wouldn't. I would go with annual renewable term. If you're middle-aged, I would. I would structure that because the level term rates are better in your middle age, and so I would look at that and I would structure it with the laddering.

That's where you want to look at the rates based upon your age and look at your different options. And then the other question is just about convertibility. I think I've covered that enough, so I'm going to skip that question. So my hope is that – my hope is this episode has been useful to you.

I know it's a lot to go through, but hopefully this will equip you and make you feel more confident no matter what the decisions are that you need to make. My final closing encouragement to you is don't be put off by the complication of this. I'm excellent at making simple things seem complicated, but that's just the way my mind works.

If you don't have any insurance, better for you to have something than have nothing. Now, yes, all the stuff that I've gone through here today is very important. I'm always looking for angles. I'm always looking for meaning, impact, how do you optimize, how do you make everything perfect. But if you're going from no insurance, go get some insurance.

And term life insurance is such an amazingly useful tool where it's so stinking cheap. It's so cheap. I mean just think of the numbers that I quoted for you earlier. A 30-year-old male, 20-year level term, a million dollars, $585 a year. Never in the history of humanity has it been so easy to assure an estate for your loved ones.

And term life insurance is an incredibly, incredibly useful tool. And by the way, that company was not even the cheapest one. The cheapest one would be down at about $400 a year. So a million bucks of 20-year level term insurance, about $400 a year with an A-rated company. Don't dither around over this stuff and don't be too picky.

Hopefully this information has helped you to actually be able to make a decision. But if you just listen to it and then you bypass it, you don't do anything, you've done nothing. This is one of my biggest fears about just doing media. As an individual financial advisor or life insurance agent, you have the opportunity and the responsibility to press people a little bit.

Most people only buy life insurance when an insurance agent sits in front of them and says, "Will you buy the policy?" And they kind of say, "Okay." So my concern is that you just take media like this and then not do anything with it. So I just beg of you, please go and do something with this.

If you do, it will make me feel good and I'll love hearing that. Thank you guys so much for your support. RadicalPersonalFinance.com/patron if this has been useful to you. If you'd like access to that annual renewable term thing, I'll have it out by the end of next week. Go to RadicalPersonalFinance.com/patron and I'll make sure you get all those details.

Talk to you tomorrow. Thank you for listening to today's show. Please subscribe to the podcast with our free mobile app so you don't miss a single episode. Just search the App Store on your device for Radical Personal Finance and you'll find our free app. If you have received value from the content of this show, please consider becoming a patron.

Your financial support is how I pay the bills for the show and how I plan to grow our content. You can support the show with as little as a dollar a month or as much as you feel the content is worth. Details are at RadicalPersonalFinance.com/patron. If you'd like to contact me personally, my email address is Joshua@RadicalPersonalFinance.com or connect with the show on Twitter @RadicalPF and at Facebook.com/RadicalPersonalFinance.

This show is intended to provide entertainment, education, and financial enlightenment, but your situation is unique and I cannot deliver any actionable advice without knowing anything about you. Please, develop a team of professional advisors who you find to be caring, competent, and trustworthy and consult them because they are the ones who can understand your specific needs, your specific goals, and provide specific answers to your questions.

I've done my absolute best to be clear and accurate in today's show, but I'm one person and I make mistakes. If you spot a mistake in something I've said, please come by the show page and comment so we can all learn together. Until tomorrow, thanks for being here. With Kroger Brand products from Ralph's, you can make all your favorite things this holiday season because Kroger Brand's proven quality products come at exceptionally low prices.

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