Your position in life changes things
The young person problem
For a young person with a young family and normal young person obligations like student loans, a high-ratio mortgage, and a car loan, it is about clearing off the past should something ugly happen. The process is find the cost to pay off the past, estimate costs to incur in the present like a funeral and time off work for the surviving spouse. Estimate the capital needed to liquidate implicit liabilities like living costs, education and a reserve for change. One spouse is more vulnerable to a layoff or illness than are two.
The coverage number tends to be quite large and the calculation of the parts is just an arithmetic question.
The resources available tend to be limited too and the resulting format choice is nearly always term insurance. The risk of an early death and the value of reducing debt mitigates against any other form of coverage. Time enough to do it later when resources are more readily available.
The midlife issues
When the mortgage is nearly liquidated, income has grown and the children are heading for school, other factors begin to appear. Retirement primarily.
Life insurance is no longer a “term” need. It is a valuable way to guarantee the security of the survivor. It is liquid, it is tax preferred while growing, it is easy to manage and it eliminates the requirement to liquidate other assets that can be difficult to deal with. Businesses especially.
The later life issues
Life insurance is a liquidity asset. It grows efficiently before death and becomes cash in the estate, usually in less than 30 days. Almost every estate has liquidity issues. Some resolved, often not.
If the executors have too little cash they must sell an illiquid asset, for whatever they can get, or borrow. Borrowing ties up the estate because lenders want a margin of security. It would not be unreasonable to believe you would tie up all the assets of the estate to borrow 40% of it.
Do the arithmetic.
Life insurance is the least costly way to put liquidity into an estate. Tax factors help. Time independence is crucial. You don’t know when you will die.
Large financial institution support is peaceful.
Things have changed
If you think about life insurance in the terms your grandparents did, you will exclude it from your planning. Today life insurance is a vibrant financial tool that meets cash needs with certainty and efficiency.
Think about it as a tool that can do one thing. It provides cash to an estate or to beneficiaries whenever the death may occur. The cash has three purposes:
- To provide financial capital where none existed before. (The young family)
- To protect wealth that already exists from losses due to forced liquidation to meet liabilities, tax obligations, estate equalization or charitable bequests.
- To speed up the processing of complicated estates.
If you think about life insurance as anything other than a tool to achieve some financial purpose, you will make mistakes about the amount, the premium and the format of the policy.
Life insurance is a true organized common sense decision. Forget what it is, arrange what it does.
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