If there was a top ten list of professionals continually at risk, real estate professionals should be near the top. In most cases, real estate professionals depend on their sales production to provide a comfortable way of life for themselves and their families.
Most start at “entry level”, become realtors, and then become brokers. Every step along the way they are committed to the needs of their clients first and foremost. After all, the real estate business is more about the people than the product.
Even when a real estate professional reaches the level of broker and begins to duplicate themselves with qualified team members, they still produce for the team and in many cases have a client list much longer than their top producer. Since realtors depend on sales to survive financially, they and their team members become the most valuable assets in the organization.
Unfortunately for real estate professionals, this asset, which is your ability to produce commissions, is at risk of becoming damaged and rendered useless if your health fails or you die.
We all protect our assets, especially if our income depends on them. We insure our homes, cars, boats, health, and the ability to work. If one of these assets fails to perform their intended purpose, we repair or replace them, and move on. But what if you die?
We know that death is certain for everyone sooner or later. Yes, we hope and pray for later, but for many of us, who have no control over the issue, it comes sooner. This is when the thread of your efforts begins to unravel and your survivors’ financial lives begin to fall apart.
Typically, we refer to survivors as family members, friends, or colleagues that will suffer financially in the event of your death. Loss of income can be financially devastated but, and this is most important, it can be mitigated. A short list of the dominoes that fall as a result of your death are:
- Loss of Income: The income you continually produced ceases to exist.
- Debt is Transferred to Your Estate: When we die our debt doesn’t disappear, it is transferred to our estate.
- Promises are Broken: Your promise to pay for your children’s college education is broken. Your promise to provide an extravagant vacation for your family is broken. Your promise to keep a roof over the heads and clothes on the backs of your family is broken. Your promise to provide a comfortable retirement income is broken.
- Expenses are Transferred to Surviving Loved Ones: When we die, our bodies must be buried or cremated in an ethical and legal manner and unless previous arrangements are made, our survivors must pay these expenses.
- Your Business May Fail: As a real estate professional, you typically have a team or brokerage that relies on your production. Without the commissions you generate, the group may flounder or even cease to exist.
Knowing that the risk of devastating financial loss could wipe out all that you’ve worked for, it makes great financial sense to mitigate the risk by transferring it to a life insurance company. In today’s economy, there are many insurance products that can affordably meet your needs and deliver comprehensive solutions for protecting you, your family, and your business.
Term life insurance is a temporary solution for a lifelong risk. It is, however, the most economical way to purchase a large amount of life insurance to cover things like paying off debt you’ve accumulated, replacing your stream of income for your family, and paying for living expenses for a period of time.
Term insurance is less expensive than permanent insurance because it does not build cash value, and the mortality rate for term insurance policyholders is much lower than other types of life insurance. In fact, less than 5 percent of term life insurance policies ever result in paying a death benefit.
Most U.S. life insurers are now offering various riders that can be purchased so your term policy will do more than just pay a death benefit. The return of premium rider allows for the policyholder to collect a refund of all paid premiums if they outlive the term of the policy.
Universal Life or UL was created when the marketplace demanded a product to accommodate consumers who wanted to “buy term and invest the rest”. This product is considered permanent insurance because when funded properly, the policy will not cancel. It is a combination of life insurance and an investment account.
In the earlier years of the policy’s coverage, the policyholder pays a premium higher than the cost of insurance, and the balance of the premium is placed in an accumulation account that earns interest on a tax-deferred basis. In the latter years of the policy, when the cost of insurance has increased because of the age of the insured, funds from the accumulation account are added to the periodic premium to make up the shortfall and keep the policy in force.
During the years when the accumulation company is building cash value, the policyholder can access those funds through policy loans or partial surrenders. Although the loans are not required to be repaid, any loan balance will be deducted from the death benefit.
There are also Universal Life policies that have an investment component that allows the policyholder to use the life insurance policy as an investment vehicle. Known as Variable Universal Life or Indexed Universal Life, these policies offer a conservative investment strategy as part of a retirement portfolio.
Whole life is considered to be the cornerstone of life insurance because of how long the product has been on the market. It is permanent life insurance because it will never cancel as long as the periodic premiums are paid. The premium that is calculated at the time a policy is issued will never change unless the policy is paid up.
Whole life policies also build cash value since the premiums paid in the early years of the policy are more than the cost of insurance. After the amount required to cover the cost of insurance is deducted from the premium payment, the balance is put in a cash value account that earns interest on a tax-deferred basis. The amount of interest that the whole life policy earns is determined by the insurance company and is guaranteed for the life of the policy. Just like Universal Life, the policyholder can access the accumulated cash in the policy through policy loans.
Similar to Universal Life, to meet the demand of the marketplace, insurers offer a Variable Whole Life product where the interest is based on the market rather than a guaranteed rate established by the insurer.
How Cash Value Grows
As an example, let’s say at 25 years old you agreed to purchase whole life insurance with a $1 million death benefit. Over the years as you pay your monthly premium, a portion of your premium payment is placed in the cash value account of your policy where it earns interest.
At age 55 your cash value account has grown steadily and is now worth $500,000. Because your policy will pay a $1 million dollar benefit to your beneficiary and you’ve accumulated $500,000 in cash value, the insurance costs must cover the remaining $500,000.
After another 10 years when you have reached age 65, the cost of your life insurance is much higher. However, when you consider the significant amount of cash in your cash value account along with the interest that has been credited, your total cash value has grown to $750,000, the policy is really only insuring $250,000. The balance of the death benefit that your policy will pay will come from the cash value that has accumulated over time.
This is a very simplified example of how permanent life insurance accumulates cash value. It doesn’t take into consideration the type of policy, cash withdrawals, and interest rates.
Usually at the top of the frequently asked question list, understanding your insurance needs is not all that difficult to calculate. Your insurance broker will typically be more than happy to complete a “needs analysis” that takes into consideration your financial situation and the financial needs of your business.
A needs analysis takes into consideration all of the scenarios that must be considered in the event of your death.
- Your average cash on hand and other liquid assets.
- Your debt and the debt of your business.
- Monthly living expenses needed to support your family for 10 years or more.
- The cost of tuition for your children.
- Final expenses for funeral and burial.
- Retirement needs of your spouse.
- Mortgage balance.
After your long-term needs are deducted from all your available resources, the remaining amount is used as the death benefit for your insurance policy. Certainly, you do not have to cover every item on your checklist, especially with one type of policy. You should, however, attempt to cover as many items as possible and plan to cover the balance as soon as it becomes affordable.