Life insurance can be critical in one person’s financial plan, and may not be needed by another. The difference is the financial and tax issues that would arise as a result of the death and the absence of the individual’s income that other family members may count on to meet their current and ongoing expenses. How much is enough and what type of insurance is best, can only be determined by a thorough needs assessment.
Second to family security, estate tax issues have an impact on life insurance decisions. Questions to ask include: what would be the expected estate tax due upon death? What assets would need to be sold to pay this tax? Is there a ready market for these assets? And what would be the impact on the survivors if these assets were sold. Answers to these and other similar questions will begin to bring needed clarification to one’s life insurance needs.
Common uses of insurance proceeds are to:
- Provide a temporary respite from financial turmoil;
- Replace an income stream;
- Replace assets used to pay estate taxes;
- Eliminate liquidity issues;
- Or, to fund a buy/sell agreement.
Not only does one’s need for insurance change over time, but the cost and the policy holder’s insurability may also change over time. Therefore, insurance decisions should be made with a long-term time horizon in mind. If one is primarily insuring an income stream, and their need for insurance is expected to diminish over time, a term policy may be an appropriate choice. Term insurance may be less expensive in the initial phase of the policy, but may become unaffordable or unobtainable in the future. Therefore an appropriate time frame should be chosen. Also, many term policies allow for a conversion to permanent insurance if certain conditions are met.
Permanent insurance has a higher initial premium, but may be better suited for purposes that do not diminish over time. These include the funding of a partnership buy/sell agreement, liquidity for estates with assets that are not quickly or easily converted to cash, and other sophisticated estate planning trusts.
Living expenses, debts, education and retirement goals as well as, age, accumulated assets and other considerations need to be evaluated to determine how much insurance one can afford, and how much insurance can one not afford to have. The financial benefit provided by life insurance will have a significant impact on the surviving family members or beneficiaries and their ability to maintain their current standard of living. The process of choosing which type and how much insurance to purchase is one of the most important decisions you can make during your lifetime and one of the greatest legacies you can leave.
If you considering comprehensive financial planning or interested in discussing life insurance protection with an independent financial planning firm, please feel free to contact us for a complimentary consultation.