The mention of life insurance can often raise an eyebrow or a streak of fear in many individuals. However, life insurance is actually a straight forward concept. It has numerous purposes, the first of which is to replace lost income when a breadwinner passes away during their working year. Another purpose is to provide liquidity upon death when families have significant assets which are illiquid such as farms or businesses. It is also used to pay off debt when the insured passes away or to make the payment to a deceased business partner’s family for their share of the business. Lastly, it can be used to create an estate for those wishing to leave something to their family or other interest.
Most of our parents purchased one or more small whole life policies earlier in their marriage. Even though the policies created actual cash value, the premiums were generally low due to their young age at the time of purchase. For these policies, the premiums never increased and often the dividends were used to purchase paid-up additions, thus the benefit increased slowly over the years as did the cash value. This resulted in most of our parents having enough life insurance to pay for final expenses regardless of their age when they passed away and in some cases, additional gifts to their heirs.
Back in the 1970s and ’80s the concept of purchasing term insurance and investing the difference made its way through the insurance world, and term policies began being packaged as level premium products for blocks of years, such as 10 or 20. Millions of individuals bought into this theory by purchasing the new term products due to their very low premium, and many may have also started an investment program. But, as we all know, things that work in theory often do not work in reality.
The intension of this theory was to have more than enough investments accumulated and little or no debt by the time retirement was reached, so life insurance was no longer needed. Unfortunately, I have yet to meet anyone who put this practice to work and purchased term insurance throughout their life and now has sufficient investments where life insurance is no longer required.
Most of the time the best result is never achieved when the pendulum is all the way to the left or the right, but rather is somewhere in the middle. Thus, purchasing both term and permanent insurance may provide the best results overall. I always ask my clients two questions. How much coverage would they like to have in place regardless of when they were to pass away? Most usually say around one hundred thousand dollars. Then I ask if replacing income lost due to death is important? The result is two needs; one long-term and one short-term. Using term insurance to meet a long-term need will result in a great deal of money being wasted and most likely when the death finally occurs, the term insurance will have been cancelled years before. Purchasing a whole life or universal life policy for the long-term need, and then adding a term policy for the difference needed to replace the lost income is in my opinion a smart move.
During the recent years of market volatility, the tolerance many investors have toward the fluctuating market values is slipping. By having life insurance as part of the long-term plan, may permit many investors to sleep a little better each night. I recently reviewed one company’s plan and the long term return on investment for the cash value and the death benefit was just under four percent per year to almost five percent per year. Clearly, this is a better option than many savings accounts or certificates of deposit today.
With recent changes to estate planning regulations, life insurance can once again be used to leverage gifts to heirs. For those who are insurable, for each one dollar gift to a trust may result in almost four dollars in estate and income tax-free funds to heirs. This is a result that may rival many investment portfolios.
For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other certified financial planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.