• How many people pay the estate tax?
• Who pays the estate tax?
• Estate Tax Returns as a Share of Deaths
• The Estate Tax is Irrelevant to More Than 99 Percent of Americans
• The Estate and Gift Tax: An Overview
• 4 Types of Term Life Insurance Companies

Despite making insurance decisions almost daily, many retirement savers don’t truly understand what they’re buying or why they need it. 

In today’s episode, I’m breaking down life insurance into simple, actionable terms.

Specifically, I’m sharing: 

• The three essential steps to managing insurable risks 
• The key differences between term and permanent life insurance 
• And four critical questions to ask yourself before buying any policy 

I’m also sharing few little-known facts and tips to help you properly evaluate options you may be considering.

Even if you think you know everything about life insurance as it relates to your retirement plan, today’s episode will provide valuable and important reminders as you continue managing your ongoing insurance needs.

To view the research and articles supporting this episode, just head over to youstaywealthy.com/252.

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At 22 years old, on my very first day as a financial advisor, a senior advisor in my office sat me down and put me on the spot:

He says, “Pretend I’m a client for a moment—can you tell me, in plain English, the difference between a stock and a bond?”

I had just graduated from a highly respected business school. I even owned a few shares of stock that my grandfather had given me. But in that moment, I froze, I couldn’t give him a clear answer. I was embarrassed that I couldn’t clearly define the difference between a stock and a bond on my first day as a financial advisor.

That moment taught me an important lesson: we often use financial terms every day, and make very important decisions around them, sometimes without truly understanding what they mean at their core. And if we don’t understand the basics, it’s easy to make costly mistakes.

Take insurance, for example. It’s a part of everyday life: cell phone insurance, travel insurance, pet insurance, homeowners insurance, health insurance. Heck, nearly every time you add an item to your Amazon cart, you’re asked if you want to buy a warranty… another form of insurance.

But when’s the last time you hit the pause button and asked: What is insurance? Like, at the most basic level, what is this thing that I likely make decisions about every single day? 

The technical definition is “a practice or arrangement by which a company provides a guarantee of compensation for specified loss, damage, illness, or death in return of a premium.”

I know, my eyes are glazed over too, so let’s simplify it further. At its core, insurance is just a form of risk management. It’s a way to protect yourself from losses that you can’t comfortably handle on your own.

So, with this simplified definition of insurance in mind, how then might we define life insurance? 

Well, life insurance pays out a predetermined sum of money upon the death of the person who is insured. When you buy life insurance, you’re managing the risk of death. More importantly, you’re managing the risk of death causing a negative financial impact on someone. Life insurance is what’s commonly referred to as an insurable risk. And from a financial planning standpoint, there are three steps to managing insurable risks:

Step # 1 is to identify the risk. For example, what’s the event you fear might have a negative financial impact if it were to happen? For life insurance, that might be the early death of a spouse creating a financial hole due to lost income, higher taxes, or delayed retirement.

Once the risk is identified, step #2 is to decide how much of that risk you can bear. And this is the step where people often go wrong. For example, if you’re a debt-free retirement saver with good income and/or a healthy nest egg, could you handle replacing a $1,000 iPhone out of pocket? Or pay for roadside assistance if you needed a tow? Probably. But could you easily replace a $1 million dollar shortfall in your retirement savings if your breadwinning spouse passed away early? Probably not.

Which leads to Step # 3: Transfer the amount you can’t bear. Whatever amount of risk you (or your heirs) can’t reasonably absorb, that’s the part you want to insure against.

So, once again, identify the risk, decide how much you can bear, and then transfer the rest.

Now that we understand the three steps, let’s look at a simple, hypothetical example of how we might put this into action. Let’s say my fear is that if my wife dies before we hit our retirement and education savings goal, I’ll be left greiving my loss and raising three kids alone all while trying to replace her income and continue saving at the same current rate. We calculate that I’d be short about one million dollars in total, but I’m confident that I’ll be able to absorb ¼ of that shortfall on my own, or about $250,000. Now that we know how much risk I can absorb, we set out to transfer the remaining risk by purchasing a $750,000 life insurance policy on my wife. 

I know it might seem like a silly, maybe rudimentary exercise, but insurance decisions can get complex, and sometimes the complexity drives us to make the wrong decision. In some cases, the wrong decision is doing nothing because the complexity is overwhelming— in other cases, it might be buying insurance we don’t need because doing something feels better than doing nothing. 

Now, here’s something the textbooks don’t talk about: peace of mind matters too. Sometimes, you determine that the risk you’ve identified is technically “bearable,” however, you quickly recognize that the anxiety of carrying it keeps you up at night. That stress has a cost…so while I’m a big believer in crunching the numbers and making an informed decision, I also believe YOUR answer might be different than the textbook answer. As always, my rule of thumb is that as long as YOUR answer or decision doesn’t jeopardize your retirement, it’s okay to diverge from what the spreadsheets are telling you to do.

One client once told me during a life insurance conversation, “I just want my life to be worth something.” And that perspective is completely valid. You might not care if, in the end, you pass away with a little less money and the insurance company keeps a little more. That’s okay. Running the numbers is important, but so is giving yourself permission—and grace—to manage risk in the way that works best for you.

With that in mind, let’s move from the what and why behind life insurance to the how. The first step is understanding the different types of coverage available.

Now, I know our listeners are smart and well-versed, but there are still a few important—and often overlooked—points to share with you. And, if nothing else, consider them valuable reminders as you continue managing and evaluating your ongoing insurance needs.

In short, there are two primary types of life insurance: term and permanent. 

Term life insurance is simple, cost-effective, and temporary. You choose the term length—10, 20, or 30 years—and the coverage amount, say $1 million. As long as you pay the annual premiums and keep the policy active, the insurance company will pay that $1 million to your beneficiary (or beneficiaries) if you pass away during the term. If you outlive it, the policy simply expires.

Term insurance is great for risks that have an end date, like paying off a mortgage, funding kids’ college, or reaching retirement savings goals. Once the risk is gone, once the mortgage is paid off or your retirement savings goals have been met, the insurance policy can go away, too.

Before we move one, I have two quick additional notes about term insurance:

First, I’m often asked about no-exam or “instant issue” policies. If you aren’t familiar, a no-exam life insurance policy lets you skip the medical exam and get coverage based on a health questionnaire, prescription history, and sometimes medical records. The insurance companies offering these policies often corroborate your answers with publicly-available data when possible as well. And while it’s a quick, convenient option—especially if you want coverage fast, hate needles, or have pre-existing medical conditions— it often comes with higher premiums and lower coverage limits than fully underwritten policies. So, in short, if you’re healthy, opt for the medical exam to get better pricing and proper coverage. 

The second note is about “laddering” life insurance policies. Historically, it’s common for families to buy and stack multiple term insurance policies with different expiration dates—one to cover the mortgage, another for retirement savings, and another for college costs—which can be a smart way to manage all of your risks at a lower cost. But today, more and more insurers are making it even simpler to achieve this. Instead of buying and juggling multiple policies, some insurance companies will allow you to start with a single large policy and gradually reduce the coverage as your different financial risks disappear. However, just know that some insurers only allow you to reduce coverage once or twice during the term, so it’s important to ask about their rules before moving forward.

Ok, let’s now move on to permanent life insurance, where things can get more complex.

Permanent insurance—a.k.a. whole life, universal life, variable life—covers you for your entire lifetime. Whether you pass away a year after purchase or at age 100, your beneficiaries receive the death benefit you paid for. And because you don’t select a term, which allows the insurance company to manage the risk they are taking, permanent life insurance policies are significantly more expensive to buy and maintain. 

In addition to a death benefit, permanent insurance policies also have a cash value component that accumulates over time, typically on a tax-deferred basis. But here’s an important nuance: the cash value itself typically isn’t paid directly to heirs. Instead, your beneficiaries receive the death benefit, which is generally tax–free. And unless the policy is structured with what’s called an “increasing death benefit” option, any accumulated cash value typically reverts back to the insurance company when you die.

This distinction is one reason permanent insurance is often misunderstood. On the surface, the tax-deferred growth looks appealing, but the way the policy is structured determines whether that cash value actually benefits your heirs or simply offsets the insurer’s obligation to pay the death claim.

At it’s core, permanent insurance is designed for risks that don’t go away like a mortgage does. Death is inevitable, but the question is whether your death or another family member’s death will create a signficant financial loss for the people left behind.

And that’s where permanent insurance has its place. Think estate planning—covering estate taxes or passing significant wealth down to heirs in a tax-efficient manner. Think business planning—funding a buy-sell agreement so the business can continue if a key partner/founder dies unexpectedly. Or think about special needs planning—making sure dependents are cared for long term.

These aren’t everyday situations. They’re very specific, very high-stakes and/or unique scenarios. And, in reality, a very, very small percentage of the population is exposed to risks that need to be managed by an expensive permanent life insurance policy. For example, the estate tax exemption in 2025 is $13.99 million per individual. In other words, you would have to die with an estate worth over $14 million dollars, or nearly $28 million if you’re married, in order to be subject to a federal estate tax bill. According to multiple sources, roughly 0.1 – 0.2% of people who die are estimated to be subject to federal estate taxes. I’ll say this again so it doesn’t get missed: Roughly 0.1 – 0.2% of deseedents will be subject to a federal estate tax bill, meaning that well over 99% of people will not pay federal estate taxes at death. Now, some history buffs listening might recall that decades ago, the estate exemption amounts were much lower than they are today. However, according to the Tax Policy Center, even with lower exemption amounts, it was still only in the 1-2% range of decedents that were subject to a federal estate tax bill.

So, rewind a couple of decades or fast forward to today, and we’re still talking about some very, very wealthy people that make up a tiny fraction of the population. And while other use cases like divorce, buy-sell agreements, or special needs planning do not always involve the uber wealthy, we’re still talking about very nuanced situations with very specific risks that, yes, permanent life insurance can be very effective at managing. 

But for most retirement savers, permanent insurance is not about covering a real and genuine risk—it’s about a salesperson pitching it as a superior investment solution and savings vehicle, and that’s where problems begin.

Because, on the surface, the pitch sounds pretty compelling. You’re told the policy builds cash value, that it grows tax-deferred, and that you can even pull money out tax-free down the road. Growth, tax benefits, protection—it checks all the boxes.

But once you peel back the layers, the story changes. The fees and commissions are often much higher than advertised, the so-called “tax-free” loans reduce your death benefit and can create tax headaches if the policy lapses, and the historical returns quoted don’t typically hold up against simpler, more transparent investment accounts. In other words, what gets sold as an investment solution is usually just an expensive insurance contract wearing a different hat. Most purchasers of these contracts would be better off buying cheaper term insurance and investing the difference in simple, low-cost investment and retirement accounts. 

And this is where the behavioral traps kick in. If the product doesn’t hold up to scrutiny, why do so many people still buy it? Well, because fear sells—and salespeople know it.

“Don’t you want guaranteed investment growth?”

“Don’t you want to protect your family from taxes?”

“Don’t you want peace of mind?”

The pitches aren’t always about education. They often push safety, certainty, and control. And when you’re already worried about taxes, market volatility, or leaving a legacy, those buttons are easy to press.

That’s why even smart, financially successful families end up with large, expensive policies that don’t solve the problems they were sold to address. The sales process is often built to override rational analysis by tapping into two forces that drive almost every money decision: fear of loss and fear of missing out.

And again, I want to be extra clear: there is nothing inherently wrong with permanent life insurance. There is a place for it, and it can be a critical planning tool, but it typically only makes sense for a tiny sliver of the population with very extreme and nuanced risks that need to be managed.

Ok, before we move on, I want to quickly highlight some of the key differences between the main types of permanent life insurance.

As I mentioned earlier, permanent life insurance comes in a few different flavors—whole life, variable life, and universal life. And to make things even more confusing, there are hybrid versions too, like variable universal life or indexed universal life.

At their core, the key differences between these policies come down to two things: how premiums are paid and how the cash value grows. Take whole life, for example. Premiums are fixed for the life of the policy, and the cash value grows at a guaranteed rate set by the insurance company. With universal life, on the other hand, you get more flexibility: The insurer sets minimum and maximum premiums, and you can choose how much to pay within that range. You can even use the policy’s cash value to cover premiums if needed. But unlike whole life, the cash value in a universal life policy doesn’t grow at a fixed guaranteed rate. Instead, the insurer credits interest to your account. In a traditional universal life policy, that credited rate is set by the insurance company and can change over time (though there’s typically a minimum floor, ranging between 1 and 3%).

Variable life insurance takes things a step further. Premiums may be fixed or flexible, but the standout feature is that you decide how the cash value is invested. Think of it like a workplace 401(k): you’re given a menu of investment options, similar to mutual funds, and you choose where to allocate the money.

Lastly, among the extra confusing hybrid policies, one that’s worth touching on briefly is guaranteed universal life. Guaranteed universal life insurance typically builds little to no cash value, which makes it popular for people who want permanent life insurance coverage without the investment component. While it costs more than term insurance since it covers you for your entire life, it’s often the most cost-effective way to buy true permanent protection if it’s needed or wanted.

And speaking of lifetime coverage, here’s one little-known fact: Some permanent life insurance policies have a built‑in ‘maturity age.’ Older policies might mature around age 95–100, and if it matures while the person is still alive, it might end and pay out money based on the policy’s rules—and sometimes that payout can be taxable if it’s more than what was paid in. The good news is that many modern policies are designed to avoid this by lasting to age 121, and some even let the owner extend the maturity date so the coverage keeps going instead of ending. So, because every policy is different, it’s important to read the policy (and any riders) to see if it will endow, what gets paid at maturity, how taxes might work, and whether the maturity date can be extended

Now, over the years hosting this show, I’ve spoken with and even worked professionally with many of our listeners, and the consensus is pretty clear: most of you lean toward avoiding permanent insurance altogether. The “buy term and invest the difference” approach remains the strategy of choice—and for most people, I think it’s the most prudent path. After all, most retirement savers either aren’t exposed to the risks that permanent insurance is designed to solve, or aren’t exposed enough to justify the added cost.

That said, the best way to confirm whether insurance truly belongs in your plan is to pressure-test it against your actual needs.

Before you buy a new policy—or hang on to one you already have—run yourself through a quick checklist by asking yourself four simple questions:

First, what specific risk am I trying to protect against?

Second, if that risk actually happened, what would the financial impact be in dollar terms?

Third, could I or my heirs realistically absorb 100% of that loss?

And fourth, if the answer is no, what’s the simplest and most cost-effective way to insure the part I or my beneficiaries can’t bear?

If you can’t even answer the very first question—if you can’t name the actual risk—then you probably don’t need the policy in the first place.

Thank you, as always for listening. If you have any questions after listening to todays episode, you can always send me an email at podcast@youstaywealthy.com. And if you need professional help with your retirement, tax, and insurance planning, consider scheduling a call with my team to learn how we can help by following the link the episode description right there in your podcast app. 

Lastly, to view the research and articles supporting today’s episode, just head over to youstaywealthy.com/252.

Disclaimer

This podcast is for informational and entertainment purposes only, and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.