Resurrecting life insurance
“Fun is like life insurance; the older you get, the more it costs.”
— Kin Hubbard
It’s a shame sometimes what the financial and insurance industry has done to tarnish its value. In a fairly recent survey, a number of people where asked to rank service professionals in order based on their influence in the process of making important decisions. As expected, a person’s physician was ranked number one followed up with Certified Public Accountant at the number two spot. Moving down the list, life insurance professional came in at No. 9 … one spot below car salesman. With all the news headlines reporting scandals and dysfunction in the financial world, it is no wonder that many people have lost faith in the integrity of the advice given by some financial professionals. None have felt this sting more than the life insurance agent. The world of life insurance has adjusted and changed tremendously over the last decade with little notice or media fanfare. In my experience, most successful financial plans include at some level the use of life insurance. I would also note that most unsuccessful plans include misuse or lack of life insurance. Let’s take a look at some basic concepts and uses for life insurance today.
1. Know what you are insuring. At the most basic level, life insurance has two purposes: To create wealth or protect wealth from loss. Creating wealth is most commonly needed by clients in the accumulation stage of their life. Typically term life insurance is used to replace the loss of income due to a premature death or to pay off debt such as a mortgage. Protecting wealth from loss is useful for clients in the distribution phase (typically retirement), and typically involves the use of universal or whole life insurance to transfer wealth or cover estate expenses.
2. Understand that life insurance is only a part of your financial and estate plan; it is not the whole plan. Most people I meet that do not like insurance have had a negative past experience that involved being sold the wrong type of insurance product for the situation. The problem was not the actual life insurance; it was the incorrect use of life insurance. When the right type of insurance is used, it should feel comfortable and appropriate. Let the context of your plan suggest the appropriate use of life insurance as the solution instead of creating reasons to make life insurance fit into your plan.
3. Life insurance — it’s not just a death benefit anymore. The landscape of life insurance has changed radically over the last few years. One of the most useful changes is the ability of some policies to use the death benefit while you are living for the purposes of paying for long-term care expenses. This is an interesting way to use the leverage of life insurance to cover the risk of long-term care needs while you are living. This is quickly becoming the strategy of choice for retirees wishing to address the devastating risk of long-term care expenses.
4. Life insurance and trusts — back in style. With the estate tax back on the radar for many people, strategies involving trust-owned life insurance are coming back into the mix. This is a popular strategy used to avoid the worst case scenario of an estate predominately made up of real estate and retirement accounts that owes estate taxes. Without additional money to pay the estate taxes, many heirs are left to fire sales on real estate or liquidating retirement accounts diminishing them by as much as 90 percent when the dust settles.
Looking at life insurance in a different light just might open up some fresh new ideas for your financial plan. Maybe life insurance isn’t so bad after all?
RC Arseneau is a Certified Financial Planner and lives with his family in Delaware. Please submit any questions or topic requests to AskRc@mail.com.
The information and opinions in this column are provided only for educational and entertainment purposes. Any reference to a financial product or strategy is not to be considered an endorsement or recommendation. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional financial, legal or tax advice. Investment Performance may vary due to timing and expenses. Rc recommends that you obtain your own independent professional advice before making any decision in relation to your particular requirements or circumstances.