Many people own life insurance. Not all the ones that need it, but still many. How many know why? Some, but not all. How many know why they have the type they do? A few. How many would solve their problem differently if they knew more about the problem and the ways available to solve it. Most, but again not all.
Understand the meaning.
Let’s begin with the common reasons for people to own life insurance. This is for individuals. The range of reasons for business is wider.
- I have a valuable asset that could be lost or damaged. Life insurance is like fire insurance in a way, but in this case the valuable asset is the ability to work and earn money. If a successful physician dies at 35, their loss is the present value of all their future earnings, after taxes, for the rest of their working life (assume retire at 60) . Today the median income for a full time practitioner is about $150,000 after income taxes. With interest at 1.5% after taxes and inflation at 1.25%, (optimistic investment parameters) the loss is about $4.4 million. For less optimistic real yield, the number is larger.
- My estate would not be in the right form if something happened. Sometimes valuable assets like homes, cottages, maybe a rental property or a farm are not saleable in part. Estate costs like taxes, probate costs, legal fees, appraisers, funeral directors and spouses time off work to deal with the new reality are real and require cash to resolve. Some costs will disappear if spouse inherits, but the point is still clear. You cannot take the deed to a cottage to pay for the costs of an estate or to buy groceries. Liquidity shortfall is a common problem.
- For some people some kinds of life insurance can help them accumulate investment assets. By law, the income earned by assets inside a life insurance policy is not taxable to the policy owner as long as the money stays in the policy and the policy is designed properly. Assets that earn 4% inside a policy grow materially more quickly than those exposed to tax on the outside. Not for everyone but it is a nice option.
- It is a way to control legacies without making the estate more complex. A beneficiary designation can be in the form of an annuity instead of a lump sum of cash. For an heir who may be profligate, a useful tool. Similarly one heir’s share could go into a trust without complexity in the will.
- Assets built up in the policies and payouts on death are generally creditor proof in respect to the insured/owner. There are some structural needs for this to happen. Not difficult.
Life insurance is not a cure all for every financial problem but it works exceptionally well when the problem is defined and the solution is sensitive to that problem and the resources of the client.
Life insurance has three purposes. To protect wealth that exists, to create wealth where it does not, and to create liquid assets.
More on kinds of insurance tomorrow.
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 866-285-7772