Life insurance is not just a document. It is what it does.
Many people get caught up in the technicality of the policy format, the rate of return, the premium flexibility and the premium duration. These can be important, but not before the reason to own the coverage is understood both in terms of amount and timing.
Life insurance protects assets and lifestyle.
If a career is cut short, life insurance can provide the money to fulfill the plan a person had for that future income. Pay off the mortgage, educate the children, provide day to day cash flow, and create an emergency fund. Even people who have passed on have made commitments and life insurance allows them to honour them.
Some assets are vulnerable when a person dies. Businesses require management. If management continuity is not available to a purchaser, the price will discount significantly. 50% is not uncommon. Cash in hand allows the discount to be recovered or it buys time to put management in place and then sell for full value.
Many assets depend on a market valuation and that market is not always benign. Just now real estate is very valuable with commercial properties trading for 15 times net or more. It is not so long ago that 10 times would have seemed excessive and that time may come again. Money buys time to get the right price. Again insurance cash buys time or offsets a discount.
Debt agreements, even guarantees, sometimes depend on a particular person. Liquidating them can be a problem without insurance cash. If the executor has too little cash they must borrow or sell something. Sell the best and keep the rest.
It is possible for someone to organize their affairs so that none of the above will matter. They can own liquid assets to resolve the problems should they arise. Given the yield discount and income taxes an investor must endure to provide predictable cash capital, that is false economy. Even people who already have the cash, and few do, it is not smart. Life insurance premiums require a tiny percentage of that capital each year.
That frees assets you could put to better use.
In the end, life insurance is not just about what it does, it is what it allows you to do because you have it. Have peace of mind, invest liquid assets better, be more tax sensitive, ease the task of an executor.
None of us know when we will need the liquid asset that life insurance will provide. The strategy is “If you cannot predict, protect.”
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