Paul “Red” Adair was an American oil well firefighter. Over his career he dealt with more than 2,000 catastrophic situations.
Red made big money too. In the 70s, $25,000 per day to assess a situation. More to fix it. I once saw him on the Johnny Carson show and Johnny asked him, “Other than the money, what is the best thing about your job?”
Red’s answer, “Well, life insurance salesmen don’t phone me.”
I still think that is amusing, but for most people having no phone calls is a benefit without an advantage. The ones who are not oil well firefighters should pay attention.
Life insurance is a useful financial tool. Properly used, it can be the difference between an unpleasant situation and catastrophe. People sometimes fail to see the dynamics of the potential situation.
You can be insurance poor in two ways.
- Own too much of the wrong product while you are alive.
- Have too little insurance when you are not
Get the best advice you can find to avoid both.
Life insurance does not help you remain alive, although I suppose it is nice to have large corporations wishing that you do so. If prayer works, maybe they should set up a group of people to pray continuously for the health and long life of their insureds. Maybe they have done that already. Offsite probably. Maybe they outsourced it.
But I digress.
Life insurance does not keep you alive but it neutralizes the financial effects, should death take you.
In most cases those financial effects can be quantified, assessed, and projected over a long time. That is the first and most important step.
Risk minimizing is step 2. The gradual accumulation of financial assets will postpone or address some of the gap between what you need and what you have already. You can find the gap using a capital needs analysis. It is reasonably straight-forward.
Product becomes the third step. If you have the need to pay off debt and nothing else, then life insurance need not last longer than the loan. If you have a need that only materializes at death, insurance that covers 10 years is not rational. If only at the second death of a couple, then single life insurance is not attractive because of pricing. A little thought goes a long way.
Never buy life insurance for what it is. Buy it for what it does.
With a good risk assessment, attention to its change over time, integration with other plans, and proper product design, a potential asset or liquidity shortfall becomes nothing more than an expense.
As Harvey MacKay’s Lesson 62 points out, “If you have a problem that can be solved by writing a check, you do not have a problem, you have an expense.” Wise managers know that the lesson extends to defining the problem completely and minimizing the expense to resolve it.
Having enough money to satisfy the obligations at death is a strategy. Tactically, there are just four ways to put cash into an estate. Of those, life insurance is the least costly.
You could work it out.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.
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