The Purpose of Life Insurance

Article written by Brian Bickett

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.  And that exploration always begins with “Can you tell me why you have life insurance?”  Let’s not get bogged down in the weeds of which type, how much and the period.  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 planner; education, ethics and experience concerning the subject of life insurance have shaped my philosophy that life insurance has four purposes, and four purposes only.

To Replace Lost Income – When beneficiaries are dependent on the income of the insured, the death benefit can be used to help with replacing the lost income upon the insured’s death.  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 – When someone does not have enough assets to cover their burial costs and one of their goals is to not place that burden on their survivors, a life insurance policy can fill this need.

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.  Life insurance 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 which outlines the transition of the business ownership when one of the partners passes.  Many times, life insurance is the tool utilized to fund the potential purchase of the deceased partner’s share of the business.

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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 over and over again 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.

Ultimately, I advise clients to match life 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 definitely 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.  The 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.  For people that, for various reasons, do not need to provide for lost income, have sufficient assets to cover their burial costs, and do not have wealth transfer goals; life insurance 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.  If you would like help planning the ride of your life and would like to feel more confident about the life insurance you have – it’s what I do for a living.  Click here to schedule an introductory call. 

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