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.

Posted by RC Arseneau on Nov 27 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.