I recently went looking for some client material and after 5 minutes or so found it exactly where it should have been. Strange how we cannot see the obvious until we explore all the other possibilities. Take life insurance.
There are obvious facts:
- I am not immortal. At some point my estate will be resolved.
- Tax effective accumulation of financial assets works better.
- Money in my estate will allow better choices while I am alive. Better pension choices, Cheaper ways to accumulate liquid assets to meet estate costs
- If death is too soon, replacement of earning power
- Creditor proof asset
When matched against my particular situation, life insurance will make sense because it efficiently and reliably inserts cash into the estate. No two situations are the same and so the solutions may vary. It is not often one plan fits. Fit will involve matching the format of the insurance product to the fabric of the problem.
There are two general kinds of life insurance.
- Permanent covers you until death.
- Temporary covers you for a predefined period after issue. Commonly ten years with a right to renew without medical evidence.
In business it is a mistake to finance the purchase of an asset that takes a long time to pay for itself with short term money. Matching usually costs a little more, but is more predictable. The same approach with life insurance. If you have a 10-year need, temporary insurance works. A loan, or teen-aged children for example. If the need is longer, like the liquidity to meet tax obligations on death, temporary insurance won’t work. Most situations are not one dimensional, or there may be budgetary issues, but the idea of need and it’s shape in time is where you want to start.
Life insurance comes in several formats. Think of them as the designer models.
Whole life which as the name implies covers you forever. The premiums are level and could be for life or some shorter period. These policies typically have “cash value” that you can access in several ways if you should need to do so. There are two varieties. Participating and non-participating. The distinction is complex and a subject for another day.
Term 10 is the entry level product. It is low priced early, but if you keep renewing it, it will become the most expensive. In this plan, the premium resets based on likelihood of death in the next 10 years. From 30 to 40 is nearly free. Renew it two times and prepare for a shock when the third renewal comes up. Very little term insurance results in a claim, but it is near mandatory as part of the portfolio for a young person. If they are healthy, most people rebuy at the renewal.
Another term variety is term 20 which renews every 20 years. This makes sense for people with children who are under 7 or so. Again the renewals, if you are uninsurable and cannot rebuy at standard rates, are “interesting.”
Term to 100 is, as it suggests, a level premium policy that runs to age 100. Much like a non-participating whole life plan but usually without cash value.
Universal life is much more flexible and can be made to look almost like any other kind. Pricing can change yearly or can be level to 100. Premiums are flexible so you can just buy insurance early, then build cash values later or pay a lot early and nothing later. Extra premiums go towards investments and the policy owner has many choices.
Most term insurance is convertible into whole life and Universal life and sometimes longer term products.
Some people prefer association, group, or creditor group coverages. Usually not a wise choice. The rates are not guaranteed and the coverage is withdrawable on a class basis by the insurer. It could go away at a time you could not replace it because of health. The bank offered plans are expensive.
There are many forms of life insurance. Each has advantages and disadvantages. A competent client will do their best to match the insurance to their well-understood needs, while retaining the ability to convert to another form as appropriate. Convertability matters because health is not guaranteed and insurers care about that.
The first step for a competent client is to find an adviser who looks to resolve the problem, not just sell high commission forms of insurance.
A competent client seeks meaning and value.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-777