What Is Life Insurance For?

Why should someone own life insurance?  Outline the reasons in 25 words or less.

There are two basic reasons:  1) to create financial wealth where none exists and 2) to protect financial wealth after it has been created.

Life insurance is a conditional option on cash.  Like any option, you must pay for it on a regular basis.  Like any option, it is the least costly way to control an asset that you may need in the future but which is currently unaffordable or unneeded.

A young family whose only significant asset is the ability to work and earn a living will lose that asset if someone dies too soon.  Life insurance can replace that asset with financial resources sufficient to carry out the expectations of the family.  Create financial wealth where none previously existed.

There are a number of necessary arithmetic steps to determine the value of the income that could be lost and assumptions about the future like investment returns, inflation taxation and the share of that income that is necessarily require for the family to survive as they wish.  Merely stuff.  Deciding to own insurance is the necessary human decision.  Type, amount, premium and the like are much less personal.

For those who own wealth, death can devalue it very quickly.  A business without its leader is frequently worth half of what it was just hours earlier.  Assets that are not liquid may be sold at low prices to pay the taxes and other cash obligations of the estate.  In these cases, Life insurance protects the other assets in the estate from urgent disposal.

A race horse breeder of my acquaintance has said that the there is a simple formula for success.  “Keep the best; sell the rest.”  Your personal net worth grows on the same basis.  Unfortunately for the planning challenged, estates don’t work like that.  When an executor must raise cash quickly, they do not sell what they want; they sell what they can.  The result is somewhat different.  “Sell the best and keep the rest.”

Every estate has a need for cash, whether to pay final expenses, to equalize shares, to make charitable donations, to pay taxes or to create financial assets for future cost of living.  The question really becomes, what is the least costly way to generate the cash.

Life insurance is the least expensive way to achieve the goals.  As my grandfather would say, “You could check it out.”

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: don@moneyfyi.com 

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