An Upbeat Take on Life Insurance

Yes, it forces you to confront your mortality. On the other hand, you're worth a lot more than your car.
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Why do they call it life insurance anyway?

You generally have to die for someone else to get it, so isn't it really death insurance? Yes it is, but how could you build a huge industry around

death

insurance? It's the same kind of strategy the Danish used to get people to move to Greenland: They called it something it wasn't. Believe me, I know because I spent a year at Thule Air Force Base in northern Greenland. As far as the eye could see -- no green!

As much as I have tried over the years, I can't seem to make the subject of life insurance a real upbeat story. But I'll try anyway. After all, it is part of the financial planning puzzle.

One of my clients is a widow who was 50 when her husband died of cancer, leaving a little more than $1 million of life insurance. The insurance was a combination of term and whole life (cash value). The couple's daughter and son were in their late teens. The daughter graduated from

Texas A&M

two years ago, is married and is doing very well. The son is in his third year at

San Diego State

and is also doing very well. The mother recently became engaged and will be married later this year. Her money eventually will go to the kids and not to her new husband.

Her story is a great testimony to the financial fortress that life insurance is all about. It is not about arguing whether term or whole life is better. It is not about creating a tax dodge. It is not about proving it can be a good investment. It's about making sure your family and your business are taken care of when you die.

Part of the cost of living is to take care of our financial responsibilities after we die. There are two reasons we don't want to deal with this issue. First, it forces us to think of our own mortality. The question of life insurance normally comes up when we're feeling immortal anyway, so why bother? Yet regardless of age, there is a risk of dying. Like they say about the lottery, "You never know."

The second reason we avoid the issue of life insurance is the cost. Instead of taking a weekend or two at Lake Tahoe, the Smoky Mountains or the Adirondacks, we have to pay the ever-painful premiums. Come to think of it, all insurance premiums are painful, including the ones for home, automobile, disability and long-term care.

You may never have to collect on the other kinds of insurance. In fact, you hope you never will. The ugly truth is that if you keep the life insurance, you know somebody's going to collect on it -- because unless the deep freeze or some other idea works, you and I are going to die. Besides, you are worth a lot more than a car or a home. In fact, you are the most important asset you have. So when you pay the next premium, think of how valuable you are to yourself and others. That should balloon the ol' self-esteem.

Most people I have talked with over the years had life insurance but had no idea how much they really needed. They just bought now and then, usually from a friend in the life insurance business. So, in selecting your life insurance, first figure out what your needs are, then determine what kind of insurance will meet those needs and how it fits into your budget.

So let's look at some of the needs that life insurance could cover:

Personal Needs

Provide income for your family.

Provide college education for your children.

Pay off a mortgage.

Cover other loans and debts.

Cover the costs of dying (funeral and medical bills).

Provide an emergency fund for a surviving spouse.

Pay estate taxes and other settlement costs.

Make a charitable gift.

Take care of various liabilities mandated by a divorce decree.

Business Needs

Provide cash for a buyout agreement between partners or owners of a business.

Provide the business enough money to temporarily replace the economic loss of a key employee.

Provide tax-favored group insurance for company employees.

Pay off business loans and debts.

Provide a tax-favored funding vehicle for a nonqualified deferred compensation program. (This is a way to provide special bonuses and compensation a few years down the road for key employees.)

There probably are other needs, but that covers most of them. Next week I will highlight two or three of the needs and then discuss steps two and three.

Full disclosure time: I have had a life insurance agent's license for 29 years and have sold various kinds of life insurance in the past as an independent agent. For the past seven years, I have had a certified insurance consultant's license issued by the states of New York and Connecticut. This enables me to charge fees to analyze individual or company needs on a fee-only basis.

Please

email me with any questions or comments you have on life insurance. Have a happy, healthy and profitable week!

Vern Hayden is a certified financial planner with American Planning Group in Westport, Conn. His column is not a recommendation to buy or sell stocks or to solicit transactions or clients. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While he cannot provide investment advice or recommendations, Hayden welcomes your feedback at

Hayden@cwixmail.com.