Posted on: May 1st, 2019
Life insurance can be an extremely important, even essential, part of your financial plan. One of the most attractive aspects of life insurance for many individuals and families is the death benefit of the policy—the money that the insurance company pays out in the event of the insured’s death.
Trouble is, navigating the life insurance landscape can be tricky—and people often make costly mistakes. Three of the biggest we see regularly:
In order to make smart life insurance decisions, there are three questions you need to ask yourself and answer (see Exhibit 1)—perhaps with the guidance of a high-caliber professional who understands the many ins and outs of life insurance.
Life insurance can be a very versatile tool, capable of replenishing an estate to cover various taxes as well as creating wealth. Nevertheless, there is only one reason to purchase life insurance: You lack the financial resources needed to fill a financial gap if you were to die. That gap might involve:
Important: Be very clear about why you want life insurance. Carefully and critically think through the outcomes you are trying to achieve and the role life insurance might be able to play.
Let’s say you determine that life insurance is something you need. It’s then time to turn to the matter of amount.
The answer to this question is based on your answer to the first question. When you know the purpose of having a death benefit, it is possible to decide just how much life insurance you need to get.
Examples: Say you are looking to create a larger estate to ensure your family would be financially secure if you died. A lot of factors can be considered to come up with an appropriate death benefit. How sophisticated you get depends on you and any advisors you enlist for help. For example, you might create cash flow projections to determine how much money your family would need to pay for specific projected expenses (education, health care, etc.). By including projected investment returns in the calculations, you can arrive at the size of the death benefit your family would require to fund critical financial needs.
Or say you have a business you plan to pass on to your daughter. Although your son has different talents and interests, you still want to leave him an inheritance—and you want things to be “fair” for both. Life insurance can be used to equalize their inheritances. Based on the financial value of the business you will be leaving to your daughter, you can determine how much life insurance you will need in order to leave your son a comparable amount of assets.
The upshot: Ascertaining how much insurance you require is fairly straightforward—but only once you are perfectly clear about why you need life insurance. Therefore, you should buy the amount of life insurance that matches your needs—and no more.
Once you know how much insurance you need, you can consider various ways to pay the premiums. Basically, there are four approaches to paying premiums:
There are advantages and disadvantages to each approach. Which one works best depends on a wide variety of factors. But the first step is to understand that you do have options to consider—there isn’t simply one method.
There’s one more issue that you may have to face when considering life insurance. For the great majority of wealthy and successful people, purchasing life insurance requires the expertise of professionals. At the same time, an all-too-common complaint about life insurance is that it is sold aggressively. Sometimes, that complaint is very justified!
If you can answer the three questions above and explain the logic behind the answers, it is more unlikely that you will end up with life insurance that does not match up well with your needs and wants. There are industry experts who can help you think through the three questions as well as help you put any life insurance in place.
Action step: If you are the least bit unsure about the professionals you are presently working with—or the life insurance you currently have—it is probably a good idea to get a second opinion about your situation. A second opinion review can help you determine whether you are on track with your finances and, if not, steps you can consider taking to get on the right path.
Contact your financial professional to get a second opinion about your life insurance needs and any existing life insurance policies you have in place.
This report was prepared by, and is reprinted with permission from, VFO Inner Circle. AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.
Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.
Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures
VFO Inner Circle Special Report
By Russ Alan Prince and John J. Bowen Jr.
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