Life Insurance – How Does That Make You Feel?

By Allie Schmidt, Financial Advisor, CPA, CFP®

When the words “life insurance” come into a conversation, a lot of people tend to shift in their seats.  Life insurance can make people uncomfortable, and I suppose for good reason.  First, we’re talking about dying, but second and maybe even more common, they’ve had a bad experience when they’ve been sold a life insurance policy—and I stress the word, SOLD.   For me, it was when one of my friends from high school first got an insurance license and called me and all of my friends about buying a pretty meaningless amount of whole life insurance, as an “investment”.  Now, I agree life insurance sold in this way can leave you jaded and sometimes with a random life insurance policy hanging out there, but don’t write it all off just yet. Life insurance— utilized appropriately— can and likely should be a fundamental piece of your comprehensive financial plan. Below are some reasons to have a life insurance policy:

• • You have a young family.  Life insurance to protect your loved ones in the event of premature death is incredibly important.  If your income supports your family, you need to make sure to have a policy in place that will continue the income and/or pay off debts in the unlikely scenario that you are no longer around.  A spouse who stays home with kids is often overlooked, because he or she does not necessarily make an income.  However, remember all of the increased costs (i.e. child care) that will be a new expense.  Many times this type of coverage can be cost-effectively obtained by purchasing a term life insurance policy.  A term policy simply provides a stated death benefit, for a stated period of time, for a specific annual premium.  Once that term is over, the policy expires.  Term policies can be effective for income replacement and/or childcare because the insurance needs change as kids get older, investment savings change, etc. So having a permanent policy for a temporary need doesn’t usually make the most sense.

• • You’d like to pass assets to your heirs.  One of the most tax-efficient ways to pass assets to the next generation is through life insurance.  The death benefit of a life insurance policy is received tax free by beneficiaries.  Depending on the size of your estate, you’ll want to make sure to appropriately title the policy, so that the death benefit is not included in the estate, if that’s applicable.  Another benefit to using life insurance for inheritance is that you can be sure to pass on a specified or minimum amount to your beneficiaries and not worry about saving that amount in your estate. This way, you can feel free enjoy the money you’ve earned, say for that around the world trip in retirement! Here you’d likely look at a permanent life insurance policy, not a term policy, since you are not protecting against a risk that declines or changes overtime, such as protecting a young family that will have changing needs. 

• • You own a business.  Many business owners have buy-sell agreements, which state what would happen to their share of the business should one of the owners die, but not many have considered funding these agreements with life insurance.  This will ensure that there will be cash available for the buyout should one of the owners pass away.  I’ve seen both term and/or permanent life insurance policies be used to fund buy-sell agreements, just depending on the individuals’ overall priorities and goals.

Life insurance shouldn’t be a sales pitch or bought on a one-off basis, it should be a part of a larger plan to protect and provide for your loved ones.  So, despite that feeling in your stomach or your past experiences, take a hard look at your situation and make sure you’re prepared, even for the unexpected. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation, or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.