I am so glad that I get a chance to talk about this whole topic of life insurance because there is so much misinformation out there. There is so much that is being sold to people that do not need to buy it. So before do not do not buy any life insurance until you've watched this video because you may not need to. And they might be selling you something that isn't good for you. So let's talk about it. I'm going to break it all down for you. What is it? What are the different types of policies?
When do you need it? What are the things to watch out for all of it when I answer the questions? Now just so we're clear, I am not an insurance sales person. So I am not driven by that. I don't sell investments. I don't sell insurance. I want to sell you on your dreams. I want to talk to you unbiased and it might piss off a couple of insurance agents. I'm okay with that because it's your dreams that I'm more worried about and I don't want you to get taken for a ride.
So why do you get life insurance in the first place? Well, we ensure someone's life to make sure that there is money available to take care of the people that you leave behind in an event of an untimely death so they can continue to survive and thrive. It isn't about making them rich. Oh, I got a $5 million policy when dad or mom passed away. I'm wealthy. That's not the purpose of it. Can you use it for that? Yes. Do I recommend it?
No. Okay. But I think that you start to look at it through a different set of eyes when you realize what you're trying to do is make sure that the people you love can continue to thrive and survive if you have an untimely death. And what I mean by this is this. And there's two ways to look at it. One, you're the incomeer. And that means that the bills are getting paid by you and your income. And if you are not there to make that income, then how do the bills get paid?
That's where life insurance enters into the process to create enough income to allow those bills to get paid so the survivors, your kids, your spouse can continue on and make it work. Now, that's, so that's one side. The income owner would need to have some sort of insurance if they don't have a money machine like I talk about in my book that will support themselves over time. The other side of it, and this is the place where I think a lot of people make the mistake.
When you have a household where there might be one income or one that stays home and raises the kids, I don't care whether it's mom or dad. It doesn't matter. But you have one that stays home and the tendencies to look at it and say, well, they stay home with the kids. I don't need life insurance on them. We're just ensuring the income. But hold on a second. Right. The greatest responsibility someone could have is raising our children. All right. It is the greatest job.
It is the greatest gift as a man who was a single dad raising his son from six years old. What a gift. What a gift. But I had to look at it and say, if God forbid something happened to me, how was Jeremy going to get taken care of? How was Jeremy going to go to college? How was Jeremy going to be able to thrive and survive and do the things that I dreamed dreamt of him doing? I had an insurance policy in place. What if I was married and I had a spouse that was taking care of him staying at home?
Does that mean that I don't need an insurance policy on her? No. The tendency is to think about, well, they're a stay at home mom or dad and we're going to ensure the income stream, which is the one that makes the money. But we don't necessarily need life insurance on the one that stays home. I think that's wrong because, like I said, the greatest job is raising our children and the fact that someone is home raising the children gives you the opportunity to go to work and make the money.
And if that person has an untimely death, who's going to raise the children? How are you going to be able to go to work to make the money to take care of things? So I think that there is a case to be made, whether you make money or don't make money to have some sort of life insurance if the factors warranted and we'll talk about more of the factors as we go deeper into this episode. So let's just talk about the kinds of insurance and what it is.
There's two primary kinds of insurance that you'll see and I'll jump to the iPad here. And so the first is what we call term life insurance. And this is the simplest form of life insurance. And basically what you're doing is you're buying insurance for a set term. You're going to buy insurance for 10 years, for 20 years, for 30 years, whatever it is. So you're paying a fee, kind of like car insurance, you're paying a fee to have that insurance for a period of time and that you paid over time.
This is a lot like renting a home. You rent the home and you pay rents while you're using the home. Now, at some point, that insurance policy, a term policy, the term lapses, it gets to the 10 years, the 20 years, the 30 years and it terminates. Now you can renew it and you can continue it if you want. Now the key with term insurance is it is the least expensive, the most cost effective insurance at the beginning.
Now as you get older, in other words, you get closer and closer to the time that the insurance might trigger. You get closer and closer to that death day. The cost goes up. But if you buy a 20, a 20 year term policy or a 30 year term policy with level premiums, you'll still pay those premiums. But when you hit the 20 years or the 30 years, those premiums, if you want to renew it, are going to go way up. I have a policy that was a term policy, it was a 20 year term policy that expired this month.
And I was paying literally $1,000 a year for a million dollar policy. And if I wanted to continue that, it was going to be $10,000 a year for the same policy. Why? Well, I'm older now. Okay, I'm 20 years older now. Two, I'm a cancer survivor, so that doesn't bode well. So they jacked the premiums up on you on these term policies. That's one of the criticisms.
But here's what I look, the way I look at it, you get a term policy to have the insurance for a period of time when you need the insurance. In other words, when people are dependent on that income stream, my son is out of the house. He's independent now. He's 34. He's wife's 32. Okay? I've got my wife, my puppies. And that's it. Okay? I don't necessarily need the insurance because I built the money machine like I talk about in my book, Building Your Money Machine, that allows me to self-insure.
So even without the insurance, my wife, if I die, is taken care of. My son is taken care of. You get to a point where we call it self-insurance, but term insurance is like renting a home. You pay for it while you use it. And when you're done, you make no more payments and you got no more insurance. Now a lot of people say, well, you have nothing at the end of the day and you're throwing money away. In fact, 99% of the policies, 99% of term policies never pay out.
And people go, see, it's waste of money. You might want to look at the other way and say, see, I didn't die. It's a better way to look at it. All right? So these policies are one type of policy. The other policy that you have is what they call permanent life insurance. And you'll see this is like, you'll hear them say, whole life, universal index life. It's different forms of permanent life insurance. This, if this is like renting the house, this is like buying the house. You own it, okay?
And you own it for life, hopefully, okay? These policies are designed to not be for a term. They are designed to last your entire life. So what happens is that when you buy a term policy, you are paying a fee, a premium, and that is going directly to the death benefit. It is just to fund the death benefit. God forbid you die. When you get a permanent insurance policy, the payment is going to places. The payment is actually going to go to the death benefit to the death benefit here if you die.
So if you have a half million dollar policy, the death benefit is a half million dollars, okay? And then the second place it's going to go is what they call a cash value account. And this is, and they present this to you as if it's like your bank account that it's going to continue to grow, the cash value of the policy is going to grow. In other words, you're going to pay bigger premiums. We'll talk about that.
And part of those premiums go to the insurance company to pay for the insurance policy, the death benefit, and to put into an account under your name, called a cash value account, it's tagged to your name and pay the commissions and all that stuff. Now, let me be really clear about this cash value account. It is not really yours. It's there. It's quasi yours. In other words, that it's part of the policy.
But if you draw the cash value out, the cash value is meant to continue to keep the policy paid for the rest of your life. Or if you draw it out in terms of a loan, it has to get paid back. It isn't your money. So I'm paying premiums to an insurance company to accumulate in this account that really isn't mine. It's really the insurance companies. And so we look at it from that perspective. Now, people will tell you, but Mel, you can borrow the money from your policy.
You're not actually borrowing the money from the policy. These are the things that they don't tell you. This is what frustrates me with some of the industry is that you're actually not borrowing the money from your policy. You're borrowing the money from the insurance company. And the insurance company is collateralizing it by the cash value of your policy. So it's as if you turn around and you say, I'm going to borrow money from a bank.
I have a CD at the bank and I'm going to use that as security. They use your cash value as security. Here's what happens. If you don't pay the borrowed money back, they're going to take it out of the cash value. They use it as collateral, but you're not borrowing it from yourself, which also means that when you pay it back, you're not paying it to yourself. You're paying it to the insurance company.
And this is the thing that people do not understand, not because they don't understand it, because it's not being transparently disclosed when it's being sold to them. They talk about all the wonderful things of permanent insurance and what will give you when you have this cash value and you can draw things out tax-free and all those things, which you can do, but is it the proper way to do it?
So understand that when you pay the loan back against the cash value with interest, it's really being paid back to the insurance company. It's not going into an account free. So this is the way that it goes. You've got term policies and you've got permanent policies. And now they come up with all kinds of different ways to look at permanent policies and how to structure them and universal indexed policies that will follow an index.
You've got variable life, you've got universal life, you've got all these different things. They're different structures to a whole life permanent policy where what they're doing is they're creating a cash value element where you're paying premiums that in some cases are 10 to 20 times more than a term policy would be. And when you look at consumer reports say that the return on investment from a policy, a permanent policy, averages about 3.5%.
So my typical thing is to say, if I need life insurance, I'm going to get life insurance through a term policy for the time that I need it. And I'm going to invest the difference because I can do better than the insurance company can when they start carving away at their commissions, at their fees and all the stuff that comes along with the policy that may not be transparently told to you. And so I think it's something to consider.
Now there's some issues with life insurance and that I want you to think about if someone's trying to say this because it is aggressively sold as a financial planning mechanism. And it is a financial planning mechanism for some people. Yes, but it isn't the first place to start. I have had people that say, hey, they consulted with people and said, cash out your 401k and put it in this whole life policy.
Y'all, you don't cash out a 401k to put it into a whole life policy to play this infinite banking game and the borrowing and all that stuff. You're going to lose 50 cents on the dollar between taxes and penalties to prematurely pull it out. And then you're going to pay the fees and the commissions to that insurance agent that's known to if I knew that agent personally, it's not practiced to me. I mean, it's crazy. So I don't sell it. I don't like it.
And in very few circumstances, do I think that you need a permanent life insurance policy? Now, when do you think, when do I think you need it? There's some things when you actually need to make sure that you have insurance for the long term. Maybe you have a special needs child. Maybe you have needs that will continue and perpetuate beyond you that you want to make sure you take care of. There are some very specific reasons to have that, but they're narrow because here's my belief.
When I am when I am able to build a portfolio, a money machine like I talk about, then life insurance becomes less problematic because I have a machine that's going to support my family. We don't need life insurance because I have a machine that's going to support my family. It's already taken care of. I'm what's called self insured. Now, is there a place for life insurance for us? Yes. And it may be a tax strategy for us to do it.
Not going to discuss it here, but know that there is a place to continue to have insurance. But I am hoping that you will build enough wealth to have a machine where you don't necessarily need the insurance. Therefore, we use the term policy for the time we need it and then we let it go. That's the way I look at it. Why do I get a policy? One, to replace the income like I talked about. You, I might want a policy to pay off the debt if I have debt on this property.
And I don't want my spouse, my wife, Stephanie, to worry about the debt. I might have a policy to pay it off so she doesn't have to liquidate assets to do it. I might have to fund future needs. When I first got my insurance policies, Jeremy was young. He was 10, 11 years old. He had a lot of years in college, in school, and living, and care that needed to be taken care of.
I needed a policy that if God forbid something happened, would take care of future needs, goals, and college, and all the needs for Jeremy. Now, doesn't need it because he's self-sufficient. If he was on a policy, it would be a gift to him, but it's not necessary because he's self-sufficient. 37% of people with kids under 18 have no insurance. I think that's a problem because what happens to those kids, what happens to the family if we don't have the insurance?
Now, if we start to look at this and say, well, when do I need to get insurance? Why should I have insurance? Let's talk about that and then let's talk about how much do you need. When to get insurance? One is if you have people that depend on you, your income streams, your spouse and children. Two, if you have financial obligations or liabilities, debts that need to be taken care of, that will not go away if God forbid you die, but when you die, the ability to pay it goes away.
So we want to make sure that's there. The third reason is to think about your age and health. So for now, I am not insurable. I am four and a quarter years past my cancer journey of being clear. They really won't look at me until I'm five years clear of the cancer. But here's the problem. I'll be 63 in a few weeks. By the time I'm past the five years, they're going to now look at me and go, hey, you're too old. What we call is this idea of do I have an insurability risk?
Do I want to make sure that if I kept my insurance policy, if I had my insurance policy, cancer or no cancer, they can't take the policy away. I can keep paying the premiums. I have the policy and I may not be able to get another policy down the road because of health issues, because of age issues. So we might want to make sure that it's there for that. The other reason is special needs.
If I have a special needs child that I know is going to require care when I'm gone or support when I'm gone, how do we fund that? How do we take care of that instead of putting them into the system and allow the system to get out of trust the system? I'm going to let them be taken care of by myself. So you could put an insurance policy in place that will last and that's probably more of a permanent insurance than a term insurance that will be able to satisfy special needs.
God forbid something happens to you. You also look at it and say, we might use insurance to pay for estate taxes. This has not been a problem in recent years because what happens in the US at least, when someone dies, you pay an estate tax and that estate tax years ago was like 50% of the value of the estate and anything above 600,000. Well, that's no longer the case. It's like 40% but it's over like $11 or $12 million.
So very rarely do you have an estate tax issue, but if you did, you could have an insurance policy that pays the estate taxes so you don't have to sell the assets to make that happen. Just a word of caution. The estate tax exemption in 20, I think 2026 is going to sunset and go back to a couple million dollars, $3 million or $3.5 million per person.
So there are going to be more people that might trigger an estate tax and if you have an insurance policy to pay the estate tax, you don't have to sell assets to pay it. Those are some of the reasons that you get the insurance. But how much do you get? And I think that that depends. When I looked at insurance for me, I did a very specific calculation. Now, there are some rules of thumb out there. I'm going to give one to you that you can use a 10 times your income as a starting point.
So if I'm making $100,000, I might get a million dollar policy. But let's say I'm making $100,000 and I might get a million dollar policy, but I also have a $400,000 mortgage on the house and I have a $100,000 student loan. So maybe what I do is I get a million and a half dollar policy so they can pay those loans off and still have a million dollars to take care of things on an income replacement standpoint to do that. So I like to do a very specific calculation of what's my spending?
What's my debt? What's the age of the beneficiaries? How long do I need it for and do that? But absent that, start with 10 to 15 times your income. It's a place to start. Now, like I said, I think we should all with absent, very specific circumstances, we should all be looking at term policies. It's the lowest cost policy. You get it for a period of time, 20, 30 years. The premium doesn't change. You've got your insurability. You've got your insurance.
The people that are dependent upon you will hopefully be independent by the time that it lapses and you go from there. If you have special needs, you look at something more permanent. But by and large, I would not be focused on paying lots of fees to insurance agents or insurance companies or a whole life policy that builds a cash value because that's what they're selling to you that you will never see.
Because the fact of the matter is when you die with a permanent policy, you're going to get the greater of the death benefit or the cash value and not both. So if you have a million dollar policy with a $300,000 cash value, you're getting the million dollars in a death benefit and the 300,000 goes to the goes to the insurance company.
Well, I'm not paying elevated premiums, elevated commissions, elevated fees to put the money back into the insurance companies coffers and not into my family's pocket. I'm going to spend the money to get the million dollar policy and I'll invest the rest and I'll probably have more than the $300,000 that I would accumulate in cash value for them to make that happen. All right. So that's how I would look at it.
I hope that this kind of gives you the lay of the land of how to do this or what to think about. Do you need the policy? Do you need life insurance? If you have people depending on you, you might you might think about it. Look at term policies. They're very inexpensive. Get level premium for the period of time that you need. Think about specific needs or special needs.
If you need it, be careful and do not get sold into a permanent whole life policy with lots of fees, lots of commissions and all kinds of promises of of tax structures and cash value and all that stuff that you actually will not benefit much from. All right. I hope that this helps. I hope that this sets you sets you free and gives you some some truth to the myths and the misses the the misses that are out there when it comes to insurance. All right.
If you have any questions, if you have any comments, do me a favor. Let me know. I look forward to it. I look forward to supporting you on this journey. Remember, I am on the path to lighten the path to financial freedom for a million families and I want one of those families to be you. Now, the other thing is, if you have not subscribed, make sure you subscribe. Stay with me on this journey. And until I see you in another episode on on the road, I always say always always strive for life.
Thank you for listening to the Applune Entrepreneurship with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the Applune Entrepreneur Facebook now by going to melabram.com or slash group. And I'll see you there.