One of the most common oversights people make when evaluating how much and what type of life insurance they need is to focus solely on the price of the insurance and their immediate need for protection (mortgage, student loans and credit card debt).
While these components are important and need to be taken into consideration, they should not necessarily be the only focus of your life insurance planning. It would be like shopping for a new car by walking onto the lot, seeing the color and model you want for an extremely low price and buying it without ever taking a test drive, examining the service plan or knowing the gas mileage the car gets. It may feel pretty good on the wallet in the short term, but sooner or later you will have to go to the gas station or something may go wrong under the hood. As we all know, trips to the gas station add up (especially now!), and trips to the mechanic or dealership are no picnic, either.
Life insurance is no different. Just like purchasing a car, there are both short-term and long-term needs to consider when shopping for life insurance coverage. You may not need all of your insurance coverage to last until you die, however, many people have found comfort and flexibility in committing a portion of their overall coverage to whole life insurance if the cost is not prohibitive to their current cash flow.
This article will not focus on the more short-term types of life insurance, i.e. term insurance, but rather will focus on some of the reasons why many have committed a portion of their overall coverage to more permanent types of coverage, like whole life insurance.
The first reason stems from a potential issue that we all face moving towards retirement. Is there a gap between our assets and their growth and what our family needs to live on, now and in the future? Obviously, this is easily identifiable in present terms by looking at your liquid assets, matching them up against your liabilities at death and then adding in the price tag of your goals for the kind of life you want your family to have. However, this gap becomes more difficult to identify when you have to make assumptions about the accumulation and growth of your assets over the next 15 plus years heading towards retirement. We would all hope and even expect our assets to grow and accumulate in a steady fashion, so as to reach anticipated levels at exactly the time when we need to draw upon them. Unfortunately, even with extremely diligent planning, this puts a tremendous amount of pressure on one’s assets to perform under potentially drastic market changes. It also puts quite a bit of pressure on an individual’s ability to earn an income in sickness and in health. What our clients like about permanent life insurance is that it can fill any gap that may exist between their assets and their needs at death, so that your family will not suffer in unison with your assets.
Planning beyond your death is one thing, but a client once asked, “What does permanent insurance do for me if I live?” The answer is very simply that the cash value in the policy can act as a safety net to take the pressure off of your investments. The cash value that accumulates on a tax-deferred basis within the permanent life insurance policy can be used to provide “living benefits” through loans or partial surrenders. Just be aware that this may reduce the policy’s cash value and death benefit and may increase the chance the policy will lapse if not properly monitored.
On the other side of the coin, if your assets do perform as expected and even accumulate to much higher levels than you had anticipated, the government may reward you with very high taxes, at death, on the estate you worked hard to build for your wife, children and grandchildren. Although it is a pleasant problem to have a large estate, it can be very unpleasant to know that a significant portion of the estate you toiled to develop will go to the federal government rather than to funding college tuitions for grandchildren or donations to your favorite charity. Having that solid base of whole life insurance can help to pay the potential estate taxes so that more of your estate can be directed towards those you love.
While permanent insurance can play a very important role in your overall portfolio, often it is the unanticipated role that it plays which ultimately defines the legacy our clients leave to their family and our society. Uncommon and unanticipated events happen everyday. They could come in the form of an accident to a child, a grandchild with specials needs or even a severe health issue for a family member. Those scenarios can trigger a need for quick cash or contribute to a desire to leave a legacy for loved ones. Our clients have found that whole life insurance and accumulated cash values can often provide them with the flexibility to cope with life’s unanticipated events.
It is important to test drive your life insurance policy and make sure that you are getting the most for your money – not just for the short term, but for the long term as well.
John C. Morris, CLTC, is an associate of FranklinMorris, Coordinating Broker for the Bar Associations Insurance Agency, Inc. For more information on the insurance benefits available to MSBA members, visit our website at: www.msba.org/departments/membership/baia/franklinmorris.pdf.