Money Rehab with Nicole Lapin - Don't Make This Expensive Money Mistake!

Episode Date: January 31, 2023

Spoiler alert: this topic isn't sexy, but it is extremely important.

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a It's time for some money rehab. Okay, okay, I'll come clean. Today we're talking about life insurance. And I know you don't want to talk about life insurance or think about life insurance, so I had to make the title of this episode vague or you would never click on it. I mean, maybe you would.

I'd love to be proven wrong. But in my experience, no one really wants to think about life insurance. But we all should. The reason this conversation is so important is when you die, it's going to suck for everyone in your life, period. But if there are financial messes to clean up or if you have people who are dependent on you as a moneymaker, it's going to suck even more. Plus, in recent years, life insurance policies have evolved to be more than just protecting your loved ones. You can actually benefit from a life insurance policy now while you're still alive and well and listening to money rehab. So let me just say this again. I get it. This is not the sexiest of topics, but it is

really important and it's not that complicated. The most important points for you to get out of today's episode are the different options for life insurance and the best ways to shop for it. So let's start with the first item, your life insurance options. The good news is there are basically two categories. First, there's whole life insurance policies, which are policies that are good for your whole life. And second, there are term life insurance policies, which are good for a shorter term. A strange aspect of term policies is that if you live longer than your predetermined term, you will need to renew or extend your policy, and the rates will likely be higher the more times you extend. So the process of putting together a term policy is

a little more daunting because you have to get really existential with this and think about how much time you have left. I know I told you it wasn't going to be fun, but stay with me. Term life insurance has a lower annual premium, but a higher payout for your beneficiaries in case of your death. For example, a $1 million policy could cost you just $500 a year. If you die after 20 years, your heirs will get $1 million for you paying $10,000. I see parents sometimes getting a term policy that will cover their kids until they turn 18, for example.

getting a term policy that will cover their kids until they turn 18, for example. Whole life insurance, on the other hand, does not have a predetermined term and gives you coverage until you die. Whole plans have higher premiums but also have a cash value that goes up at a fixed rate. This is the type of life insurance that people view as an investment vehicle because you can borrow from it whenever you want and it grows tax-de deferred, kind of like a 401k where you don't pay tax as it grows, but you do when you take it out. And it gives you dividend checks in retirement. Critics of whole life insurance as an investment, and there are many, say that the guaranteed rates of return aren't much more awesome, if at all, than what you would get from the stock market. Proponents say that the guaranteed rates of return aren't much more awesome, if at all, than what you would get from the stock market.

Proponents say that the stock market doesn't offer a guaranteed rate of return. And it's another way wealthy people who max out their retirement vehicles can go on to have their money grow tax-deferred or minimize estate taxes. And these plans can also be used as collateral on loans. This is called collateral assignment. It means that if you die before your loan is paid off, then the insurance policy will pay off the lender before it pays out to your heirs. This is a great way to access credit that you otherwise wouldn't be able to, say, if you want to take out a huge business loan. Whole life insurance policies have a cash value as well as a death benefit. You can borrow against that cash value with a loan offered by the

insurance company. These loans have very low rates and can be used for things like college expenses. Unlike 529 college savings accounts, life insurance policies aren't counted as part of the assessment of the parental contributions done for financial aid. So this is kind of a sneaky way to get a little help with your kids' college expenses. Since you're basically borrowing from yourself, you don't really need to pay back the loan, although it will reduce death benefits paid out after your death. You can also opt to invest your cash value into the stock market and have it grow in value. You can use this cash as a little nest egg or even as sort of a bonus

retirement account. If you don't need any of these things, you may have the option of converting your cash value into increased death benefits for your survivor. Since life insurance policy payouts aren't taxed, this can be an easy way to slip a little more money to your survivors. So while whole life insurance policies are more expensive, they do offer a lot more flexibility than term life insurance policies. Another benefit of whole life insurance policies is that it can be bundled with other types of insurance policies, like long-term care plans. When bundled together, these policies work as an either-or thing. You can use the policy to provide long-term care, or if you don't need long-term care, the policy will pay out as life

insurance for your dependents. Given the fact that 70% of American adults who reach 65 or older will need long-term care, these policies can be a huge financial life raft for families that can't afford them. You may be thinking, hey, Lappin, this does not apply to me at all. And maybe it doesn't. But the earlier you get your policy in place, the cheaper it is. Statistically speaking, a 30-year-old woman is going to make it to 50. So insurance companies will offer her a much lower rate than, say, an 80-year-old man. So when it comes to buying life insurance, there's no point in waiting for a deal.

The best time to buy is right now because you're never as young as you are today. For today's tip, you can take straight to the bank. Do you have life insurance already? Have you lost weight or quit drinking or smoking since you bought it? Or have you improved your health in some other way? Well, you can ask your insurance company to reassess you and see how much your monthly payments would be now. They can't raise your premiums if it's worse, but if you really nailed that new year, new me vibe and improved your health significantly, your insurance company may lower your monthly payments. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin.

Money Rehab's executive producer is Morgan Levoy. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.