Until Death Do Us Part?

How to help your kids financially without going broke

As a parent, what do you want most for your kids? Have you really thought about how you're really going to make that a reality? Perhaps you have a savings account to help teach them about money in the future. Perhaps you’ve set up an education fund (like a 529 plan in the USA or RESP in Canada) to help them pay for that?

But what about all the expenses that come up AFTER post secondary education? Like buying a house, starting a business, or buying a car? If you’re like most parents, you’ll probably want to help your kids out with some of these big expenses (usually even to your own financial detriment- goodbye retirement!). 

When you think about life insurance, do you think it's protection for your family if you die? An expense you pay that you will never see a benefit from? That’s most people's view. But I’ve got a secret from the wealthy to share with you - life insurance doesn’t have to be death insurance.

TRUTH- BOMB

The BEST life insurance is made for LIVING.

This next part is probably going to suck for many of you to read because I’m going to have to break down different types of insurance and lets face it - this is boring stuff (unless you're a little crazy like me and looooove to find out where those ever so popular sayings + thoughts  we all have come from).

I bet my next years’ salary you’ve heard the phrase “buy term and invest the difference” a time or two if you’ve ever looked into life insurance. There's LOADS of gurus (looking at you Dave Ramsey) and financial professionals out there that repeat this on autopilot like it's a no-brainer fact. Ever wonder where the phrase came from?

This phrase was a marketing gimmick an insurance company created in the 60’s to convince people to cash in their whole life insurance policies and buy term insurance. BTW, it might interest you to know insurance companies make most of their money selling term insurance! Why were people willing to cash in other policies? Well there was this little internal report in the insurance industry that was made public that on the surface, seemed bad. It said that whole life policies, and the way parts of them worked (like the guaranteed values and dividends) were hard (or really nearly impossible) for the average person to understand.  

It became a huge media phenomenon that labeled these products as “bad” just because the internal math in them (that is extremely complex) was not understood by people like you and me (yeah even I couldn’t do those calculations on my own - they are for skilled mathematicians). Funny thing is, the report didn’t say whole life products were bad products, just that they were hard to understand.  It was this report and the negative media coverage + insurance companies and financial advisors using it to their advantage to promote other products that led to a huge shift in the amount of people that purchased whole life products vs term products.

So now lets explore the different options you have when you need insurance - and trust me you need it now. I’m of the belief there is no ‘one size fits all” for any family. Everyone's needs are different and a combination of insurances is usually what works best. 

Warning - if you just cannot do - or have no interest in - knowing the specifics you can skip all this to the short and simple analogy section. Truthfully though, having a full understanding of the different types of insurance will help you understand the process of family banking and why we use what we use to accomplish the goal.

Term Insurance 

Term insurance is cheap. At least when you’re young. It’s the proverbial death insurance. You get no benefit from these products while you live except the peace of mind of knowing your family can survive if the worst happens.

Why is it cheap? Because you are covered for a specific length of time. Imagine you are 24 years old. Chances are, you’ll live for the next year, or ten, or even 20 years without any health concerns. Now imagine you’re 84. The chances of you passing on in the next year are now a LOT higher, and even higher that you’ll graduate from the earth in 10 or 20 years time (toast to you if you hit the centurion age!)

With term insurance, the longer the term (ie 20 years instead of 10), the more expensive it is every month or year because you’re more likely to die during the 20 year time than the 10 year time. Insurance companies use these things called “morbidity tables” to figure out how many people out of a group of 1000 will die over a specific length of time. They use these numbers to price term insurance with the thinking of ‘X number of people will need their policy to pay out so we have to cover X number of payouts. If we charge each of these 1000 people Y dollars, we will make enough money to cover that and a profit!”

There's some REALLY important things to know about term insurance too. 

1. You can’t renew it after you hit a certain age (anywhere from 65-85 depending on the company)

2. When you renew, the cost will increase DRAMATICALLY

3. It’s actually more expensive to buy term insurance over your lifetime than it is to buy a permanent life insurance product - if you could even get it to cover your entire life.

The concept of “buy term and invest the difference” assumes that you’re going to have all the financial discipline to invest all the money you would have put into a permanent life insurance product AND that you will earn good, consistent returns on that money. This just isn't the reality for most of us.

Have you ever had a payment, like a car payment, you’ve had to make each month and for five years you always came up with the money somehow or other. Once your payments were done, did you start putting that money into savings or did it seem to just disappear like a fart in the wind? 

Here’s a big shocker - if we have more money available that doesn’t have a specific place to go (called disposable income) we spend it! Or at least most of us do ... .So trying to “buy term and invest the difference” only works if you KEEP PUTTING THE MONEY you would have spent on a permanent product into investments - which most people just won’t do.

Don’t get me wrong. Term insurance has its place and is the perfect product for certain things like debt coverage - think cars, loans and mortgages (just don’t buy mortgage life insurance through the bank - it will not pay 9/10 times) because for things like this, you need death insurance.

Permanent Insurance

Permanent insurance is life insurance for the living. It isn’t all so cut and dry like term insurance. 

You can use it to transfer wealth tax free, as a place to store money, it can fund retirement, help with long term care housing costs, and leave a nest egg to your family in the later years. It lasts your entire life and does not expire as long as premiums are paid.

There are three main types - variable life, whole life, and universal life.We are only going to talk about the main two here - universal life and whole life.

Universal life

The first thing you need to know about permanent life insurance if you haven’t figured it out from the little history lesson on the scathing report is that it is COMPLEX. Both kinds can be built in so many different ways, with totally different options and every company that underwrites (approves) insurance policies has different designs. It is EXACTLY for this reason of complexity that many people, even licensed insurance advisors, don’t fully understand all the products they sell and all the different ways they can be used - like for a family banking system.

Let's start with Universal Life. More times than not, if you go to an insurance advisor this is what they will show you. It looks like a really attractive product on the surface. The premiums (how much it costs to be covered) are relatively low, and you can get great coverage. You’ll probably also be told that you only have to pay that monthly payment for 20 years and then will be covered for life. Sounds amazing, doesn’t it?

Unfortunately, that’s not how it usually plays out. Ask anyone who bought Universal life in the 90’s or 2000’s and they will tell you a different story.

The thing is, the way UniversalLife policies are structured -which can’t be changed- is with this thing called “Yearly Renewable Term” or YRT for short. What it means is that the policy is built so it’s like you are buying one year of term insurance every single year for life. Great when you’re young, not so great when you get older.

These policies have two sides - a “cost of insurance” side, and an “investment” side. The idea is you pay say $200/month and part of that, say if you’re 25 it’s $20, goes to the insurance side to pay for your current one year of term insurance, and the other $180 goes to the investment side to hopefully grow and pay the insurance side when you’re older. 

The money that goes in the investment side is -you guessed it - invested, usually in the stock market. I’ll repeat that. IN THE STOCK MARKET. That means your “extra” that is supposed to pay for the insurance in the later years is put at risk. The pool of money can go up or down. ALL THE RISK of if your policy will still cover you in the future, the risk of you not having the money in the policy to pay the insurance side, is PLACED ON YOU. These policies almost always collapse (meaning they stop covering you) if you live into the later years of life. 

You could lower the risk of your policy collapsing if you did one thing - Put waaaaayyyy more money into it than you have to - called overfunding. But if you did that, then you are no longer getting the “cheap” cost of this type of “permanent” insurance.

Whole Life

Whole life is more expensive than Universal life because the risk on these policies is carried by the insurance company, not the policy owner. A whole life policy is a guaranteed private contract the policy owner (person who buys the insurance) has with the insurance company. The insurance company not only has to provide the death benefit if you graduate from the earth, they also have to provide something called a “guaranteed cash value” - an amount you could access while living to do the things you need + want to do in your life - like buy car, or treehouse with an underground bunker.

A whole life policy will never collapse on you as long as the premiums are paid. There is also flexibility built into the way a family banking whole life policy is built in order to allow a range of money to go in if you have s=cash flow that is high some years and lower other years. 

These policies also pay you dividends (a payment of money similar to interest but based off the profits the insurance company makes). These dividends are set up to buy you more insurance, which increases your “guaranteed values” and the m=amount of money you can use for other things during your life.

You could also set your dividends up to pay your policy premiums (the money needed to keep the policy going) so you wouldn’t need to pay into it any more. But really, if you KNEW you would get $3-7 out for every $1 you put into something, would you want to stop putting money in? Especially if you could still use it anyway?

Simple analogies for those who skipped the boring (or informative!!) part:

Term Insurance - is like renting a car. You have it for a set amount of time and you know you have to give it back when the rental period is over. You don’t build up any savings, you spent the money.

Universal Life - is like leasing a car. You spend less upfront, but if you want to keep it forever you have to put more money into it and get a loan to pay out the balloon payment at the end of the lease. You built a bit of savings here, but you don’t necessarily get to keep it.

Whole Life - is like buying a car. The upfront cost is a little more than the lease, but you own it. There are no financial surprises at the end of the day. You’ve built up some savings here through equity. The car is yours and you can do what you want with it including using it as collateral for a loan (a thing the lender would take back if you didn’t make your promised payments).

Conclusion

Family banking systems are built with whole life insurance because of the safety factor of the way they are built. The money is guaranteed to grow at a set rate, the cash values can NEVER go down, and it cannot collapse if premiums are paid.  It’s built to last your entire life AND still give you access to that money similar to if it were in a savings account.

Isn’t that EXCITING??? - hey I’m a nerd so I really do think it's exciting! I know in my heart of hearts how this can help you get that financial security you crave. I live it every day. As a faithful reader I hope you are starting to see the possibilities in your own life of how this can take shape and start taking baby steps away from the financial indoctrination banks and institutions have taught us to keep us locked in debt and struggling. There is a way out, I promise you.

If you’re enjoying what you're learning so far, or have any questions I’d looooove to hear from you in my inbox or DM’s on Substack! And if you’re ready to take a deep dive into learning more about how you can implement these baby steps to financial security into your life, sign up for my upcoming course beta test where you will get a STEEP discount and learn all about family banking systems no matter your starting point. 

Until next time, 

Becky “baby steps” Webster

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