They’ll Be Smiling at Your Funeral

(SANEPR.com) June 12, 2009 -- Preparation for the passing of a loved one is the most uncomfortable topic in wealth management planning. No one wants to think about dying. And, no one wants to die. (It was painful enough to watch the dog die in Marley and Me let alone think about the death of say a spouse.) Subsequently, most people are woefully unprepared for the financial complexities and pitfalls resulting from this avoidance in planning. So worrying is this subject that half of those reading this article have already clicked to another webpage. For the remaining readers, please consider the situation one of our clients recently found himself in when planning for your life insurance needs.

Our client was three years older than his wife; his pension which would cease upon his death provided the majority of the couple’s income; and the couple’s assets were insufficient to provide her with enough income to cover her daily expenses after his death. The couple’s age difference combined with mortality figures—women on average live five to six years longer than men—indicated that his wife would live perhaps eight to nine years longer than he. The solution to providing his wife with more income after his death was the purchase of whole life insurance.

Although there were many types of life insurance that could have been acquired to remedy our client’s problem, we seriously considered only the two main types of insurance: term life and whole life. Term insurance provides temporary, basic coverage for a predetermined timeframe (term). The policy is renewable, at an increased premium, at the end of the term. Most people prefer to purchase term insurance as it offers substantial coverage at the most inexpensive price.

Whole life insurance, in contrast to term life insurance, offers permanent coverage, through sustained payments and provides a guaranteed death benefit to beneficiaries. These policies offer more flexibility than term life insurance. Some whole life insurance policies contain a cash value that can be received before the policyholder’s passing; while other policies allow the policyholder to borrow money against the cash value of the policy. These types of policies allow money to be borrowed, at negligible rates, without the risk of reimbursement. If the policyholder passes with a loan against the policy, the loan amount is subtracted from the beneficiaries’ death benefit. For this reason, our client decided on whole life instead of term life insurance.

It is possible that I will be drummed out of the wealth management industry or at a minimum have my insurance brochures confiscated for offering the following suggestion, but the advice is worth the risk: buy the least expensive policy that satisfies your particular needs. Do not over insure. Be mindful of a few factors when making the decision to purchase life insurance.

Cost: Although term insurance tends to be cheaper than whole life insurance, cost alone should not dictate the appropriate policy type for you. Find the perfect balance between your insurance needs and what you can afford. And, be mindful of the bells and whistles (known as riders) that agents might add to your policy. Riders may greatly increase the cost of a policy without adding much value to it.

Liquidity: The ability to convert a policy into cash is termed liquidity. Whole life insurance, unlike term, grants the policyholder access to the cash value of the policy. Let the availability of your other liquid assets inform your liquidity needs on the insurance policy you choose.

Timeframe: Consider whether the insurance is needed to cover the cost of something that will be paid off in a specific timeframe (e.g., a mortgage); or whether the insurance is needed to provide ongoing financial support (e.g., income for a spouse whose life expectancy might be difficult to anticipate). Term insurance is an inexpensive way to cover the cost of a mortgage. However, term insurance becomes incrementally more expensive to renew after the completion of each term. Alternatively, whole life insurance when compared to term insurance is more expensive initially. However, payments are only made for the insurance for a set, finite amount of time and the policy does not need to be renewed. You are covered for the policy amount for the rest of your life. Over time you might spend more money buying term insurance than had you bought whole life insurance. Therefore, if you are buying insurance to replace your income for another, consider the whole life insurance. After all, you cannot know when you are going to die, so you could spend more to continually renew term insurance.

Insurance Company Credit Ratings: This could be the topic of a wholly different article. It suffices to say that it is important that the company insuring your policy has longevity and will be there when you need them. Most insurance companies will produce their ratings relative to their peers upon request. Look for insurance companies rated in the “A” range or higher.

Life insurance is a great way to create an estate for your beneficiaries. In many ways the death benefits are so good; it is a shame you have to die to use them.

The above article was created by the professionals at Generations Financial Services. They can be contacted at info@generationsfinancialservices.com or at 800-260-1615.