The process for obtaining the appropriate type of life insurance follows a fairly structured protocol:
- An evaluation of the need for additional capital at death should be done. This analysis balances net liquid assets with the probable costs of a client’s goals;
- A determination of how long the need for that additional capital at death (life insurance) should be made. This will vary based on certain key assumptions such as cost of expenses, taxation and rates of growth for other assets. Ultimately, it is an inexact science, but the process can help establish a reasonably good estimate of how long the need for life insurance is.
- With various forms of insurance available, current cash flow to pay premium(s) becomes a factor in selecting which policy (or policies) currently fits a client’s needs.
Basic Forms of Life Insurance
There are three basic forms of life insurance policies: whole life, term and universal. There are numerous hybrids among them and various funding and accumulation choices, but each is some modification to these core products.
A key variable among these products is their individual price effectiveness when measured over time. Generally, the breakdown of a relative cost-per-benefit analysis among them will look like this:
- Short-term needs: Term
- Medium length needs: Universal
- Permanent needs: Whole Life
(Many factors affect any product price analysis and this outline is merely a frame of reference, not a formal recommendation.)
Differences in Perspectives
There is a general under-estimation of how long one will need to keep life insurance in force at the time of purchase. A 30-year-old might not see needs beyond age 60; a 60-year-old rarely cancels insurance purchased earlier – and often extends coverage (if possible) that is soon due to expire. Why the difference in perspective?
In later years, several things may be clear that were less clear when coverage was purchased:
- The inherent efficiency of life insurance as a financial instrument for delivering cash at death to a family or business is clearer to those who have seen wide variations in effectiveness of other financial instruments;
- What is perceived as an ‘older’ age and some sort of ‘financial finish line’ at younger ages, often becomes more of a financial continuum at older ages – responsibilities continue and/or goals expand, and life insurance still can play a key role in providing financial security;
- Circumstances simply change from what was expected. Special needs arise; wealth generates taxation; health problems may limit accumulation and financial options; equity based investments fluctuate; real estate becomes less liquid; business interests become more complicated;
- Often a sense of one’s own mortality will impact the attitude about premium cost. Simply put, life insurance can look like a very good deal if one feels a claim may be paid sooner rather than later.
- The living by-product of permanent whole life insurance – cash value accumulation – provides many benefits during life that are not fully anticipated by younger purchasers. Cash values have funded college tuitions when money otherwise was not available; saved businesses from a cash flow crunch at crucial moments; assured retirement income streams that would have been insufficient without them; covered tax bills of unanticipated levels; and provided a base guarantee to financial portfolios that fluctuated wildly, providing security when things seemed very uncertain.
Clients can change their perspective on the need for life insurance as their experience changes their way of viewing things. Our firm’s job, in our clients’ insurance planning, is to bring our experience and a broad perspective to assist in making the proper long-term purchase decisions to help ensure that the life of their life insurance will complement their life experience at every age along their financial continuum.
David M. Morris, JD, CLU, President 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.