Death is inevitable, but death at a financially convenient time is not inevitable. Life insurance exists so the inconvenience is minimized. Die neat. It deals with the inevitable, and the premium is the price to remove the inconvenience.
You may have heard people talk about being insurance poor. They often see it only in terms of price. There are two ways to be insurance poor.
- In the present, own inappropriate product, or pay premiums for risks you do not have.
- In the future, have too little coverage.
In case 1, the person is alive and can solve the problem. They may require a new advisor who is more problem oriented. In case 2, the survivors will be poor and will be unable to remedy the situation.
A successful life is about control. Do not give it up easily.
How much coverage and the kind of insurance is a function of what it must do.
If it is to pay off debts and to provide cash for the education of children, home expenses, groceries and piano lessons, the need is likely temporary, (You will build your own wealth over time.) Temporary being something around 20 years for young children. Term insurance with a guaranteed premium for 20 years makes for an inexpensive, yet complete solution to that problem.
If it is to provide income for spouse beyond when the children have been raised, then the coverage must be able to last longer than 20 years. Some forms of inexpensive non-par coverage may work better. Participating could work but the value of the need must match the availability of current resources. Participating costs more. More about this later in the week.
Most forms of term insurance are convertible to something else. Sometimes it is easiest to convert coverage no longer needed for children costs to permanent insurance for the spouse. People whose children have moved on usually can afford the premium.
A flexible choice might be universal life. It costs more than term to buy, but the premiums are flexible. Pay in when you have money, do not when you do not. The surplus cash earns investment income and that helps subsidize the insurance cost. These plans are fine in the beginning but unless you deposit considerable excess, they become costly if it turns out you need the insurance for a long time. They come in two billing formats. Insurance cost based on your age, changing each year or level for some period of time. Could be to 100, to 85, or even paid up in 20 years. Other than annually increasing, the tax advantages will be significantly impaired unless the plan is in place before 2017.
Estate costs are not insignificant. Taxes maybe, legal, probate, executor’s fees, a funeral and so on. These always require permanent coverage. The insurance must pay off whenever death occurs.
The essence of the advisors role is to deal with the amount at risk now, the expected amount at risk as time passes, the forms of insurance available to match the risks defined, and the currently available resources to pay the premiums.
There is no perfect and enduring solution. The portfolio should be reviewed at regular intervals.
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