I worked a recent case and wrote a policy for a 42-year-old real estate agent, Kelly, who is divorced and mother of two teenage children (freshman in college and senior in college).

Kim divorced 5 years ago and never had any life insurance. An unfortunate death to one of Kim’s childhood friends, who also had no insurance, was the motivation for Kim to reach out to me. The conversation began like this;

“I would like to look into life insurance for my children and understand the options. My budget is $60-100 per month. I would like to also learn more about policies like my boyfriend has, he has a policy with Northwestern Mutual that gets money once he gets vested.” ~Kelly

#1) I knew immediately the types of policies that Kelly was referring to when she said “get money once he is vested“, even though we typically do not use the word “vested”.

#2) At this age, as a non-smoker and in GREAT health, Kelly was going to get VERY favorable rates for insurance.

#3) Kelly, as a non-smoker and in GREAT health was going to have a world of options, it was just a matter of asking additional questions and finding the exact needs.

So, here were the important additional questions to help understand the frame of reference;

Me: “Kelly, assuming your children are your beneficiaries, have you considered how much death benefit? Let’s discuss this before we move on.

Kelly: “My immediate concerns are my final expenses and also leave a little bit for my children.”

We peeled away a few layers and dove a little deeper into the need to get a better understand of what “leave something for my children” means.

This is where an agent is very helpful in identifying the exact needs of the client, the client may not fully understand the total amount of benefit required. A simple rule of thumb to understand your life insurance coverage is DIME;

• D – Debt (unsecured, credit, cars, etc.)
• I – Income (replacement income to sustain family & lifestyle)
• M – Mortgage (pay off the mortgage)
• E – Education (any education required for the children)

Now that we hashed out the death benefit needs, we can look further into the “get money once I am vested part.”

SOLUTION #1 – Buy Term and Invest the Rest Strategy

Upon review of Kelly’s DIME needs, she (we) quickly realized there was a lot more to a death benefit need than just final expenses and “leaving something.” I also assured Kelly because of her smoking and health statuses, that she would receive VERY favorable rates. We agreed on a $400,000 10 term policy (from Sagicor) for $22 per month.

At this point, it’s IMPERATIVE to understand that the death benefit part has been accomplished. If your budget is $100 and only $22 has been allocated to life insurance, you can very easily use the “Buy term and invest the rest” strategy; it’s valid, it’s effective and in many cases it makes sense. The challenge becomes; “Invest in what?”

There are a number of options to consider at this point including qualified (pre-tax) and non-qualified (post-tax) options such as IRA’s, Roth IRA’s, Mutual Funds, Stocks/Bonds and much more.

SOLUTION #2 – Full IUL Strategy

IUL, or Indexed Universal Life, policies are permanent life insurance policies that are packaged with an annual renewable term policy and a side cash account. IUL’s receive favorable (incredible) tax treatment in the form of TAX-FREE gains. You can “stuff” money into an IUL up to a limit but you must maintain a proper amount of life insurance to keep the favorable tax treatment (we call this amount the limit of term and cash accumulation a “corridor”)

The challenge with an IUL is that while it will solve your death benefit needs, when you have a needs like Kelly did for $400,000 that if you consume too much of the IUL monthly premium for term insurance, you take away the cash accumulation power of the IUL (the vesting part as Kelly says) – AND – because of the increasing cost of term insurance, the policy would lapse at age 78.

If Kelly wanted to use a full IUL, she would either have to decrease her death benefit OR increase her premium.

NOTE: Kelly would be willing to pay more into her policy when she has good months, but wanted to ensure she has a smaller commitment on a monthly basis.

SOLUTION #3 – The “Split Ticket” Solution (IUL with Side Term)

A “Split Ticket” is a strategy used by insurance agents and companies to satisfy MULTIPLE NEEDS of an insurance policy. The strategy is to write multiple policies to maximize benefits and minimize costs, the complimentary policies maximize the benefits of an individual need.

EXAMPLES: Common split ticket strategies are for;

• Death Benefit & Long Term Care
• Death Benefit & Cash Accumulation
• Death Benefit & Disability Insurance
• Death Benefit & Critical Illness

NOTE: For a variety of reasons, many agents will NOT introduce of proposing split tickets to you, including; #1) agents typically make less commission on a split ticket; #2) lack of training or product knowledge.

The Split-Ticket was our winner, here is how we managed our split ticket.

• Term Insurance – $400K 10 Year Term at $22 per month
• IUL – $26K year one face value term with $38,000 cash value and $65,000 death benefit at age 67 – Kelly stops paying premiums at age 67, the policy becomes “self-sustaining”. (See two images below, for Kelly at age 67 and Kelly at age 90.)

Additional benefits of using a “Split Ticket” for Kelly;

• Exploit the low cost of term for 10 years while Kelly is still paying the mortgage and while children are in college.
• When the term expires, the death benefit from the IUL becomes the permanent life insurance, ensuring that final expenses and something are left behind for the children.
• Flexibility is built into the IUL policy to allow for future overfunding (additional premium dollar or additional lump sum payments) allow for more death benefit and more cash accumulation.

Summary & Takeaway – 42 Year Old Healthy Non-Smoking Realtor Asset Protection, Life Insurance, and Retirement Funding

Life insurance is asset protection by providing beneficiaries with a benefit that is passed along tax-free, secure from creditors and does not have to traverse probate.

Nobody is going to mistake a $38,000 fund as a means for funding retirement. That said, it’s $38,000 worth of TAX-FREE funds in your retirement that you can access anytime you want – there are no distribution requirements like with other retirement vehicles.