Do I have enough life insurance? It’s a simple question with a simple answer. However, getting from the question to the answer requires a bit of exploration.
That exploration always begins with “Can you tell me why you have life-insurance?”
For the sake of simplicity, let’s not get bogged down by the details of type and policy terms just yet. Instead let’s take a strategic perspective as to how is it serving you in your life.
Why Should I Have Life Insurance?
As a fee-only financial advisor, my education, ethics and experience concerning this subject has shaped my philosophy. I believe that this type of insurance has four purposes, and four purposes only.
- To Replace Lost Income – When beneficiaries depend on the income of the insured, the death benefit will help replace the lost income. The death benefit can be used to create on-going income, to payoff existing debts or a combination of the two.
- To Cover Burial Costs – Often it is a goal to not have your burial costs be a burden to your survivors. A proper policy can fill this need when someone does not have enough assets to cover their burial.
- To Transfer Assets to the Next Generation – There are times when using life insurance for wealth transfer is one of the most efficient ways to do so. These policies can create a fully valued tax-free asset upon receipt of the first premium.
- To Fund a Buy-Sell Agreement – Business partners should have a buy-sell agreement in place. These agreements usually outline the transition of the business ownership when one of the partners passes. Many times, life insurance is the tool utilized to fund the purchase of the deceased partner’s share of the business.
What’s Not on the List
You might have noticed that investing is not on this short list. There are several types of life insurance that have an investing component built into the policy.
My experience has shown me that mutating the original intent and structure of life insurance into an investment vehicle is not very efficient for the policy holder. More efficient (i.e. less expensive) vehicles exist for investing.
Match Your Needs with Your Goals
Ultimately, I advise clients to match insurance policies with their needs and goals. This includes the type of insurance, the length of the policy, and the amount of the death benefit.
There are instances where a client needs more or less death benefit, longer or short length of the policy, and even a different type of life insurance to better match what they are trying to accomplish.
When used properly, this tool that is life insurance needs to fit the task at hand. And the truth is there are situations when life insurance is not needed at all.
Some May Not Even Need Life Insurance
People fall into this category for various reasons. They either do not need to provide for lost income, have sufficient assets to cover their burial costs, and/or do not have wealth transfer goals. In this instance, a life policy should not be part of their financial plan.
Life insurance can be a confusing topic simple due to the many different types of policies. Let alone the many life insurance companies that can and do offer different benefit types, options, and riders all within the same type of policy.
Part of our retirement planning services includes going through all of the insurance options you have or may need. Our purpose is to help you reach your goals while managing the risk of running out of money.
If you would like help with your Retirement Planning and would like to feel more confident about the life policy you have – it’s what I do for a living. Click here to schedule an introductory call.