Assurance in a Time of Uncertainty
When will this end?
Will my business survive?
Will I have to lay off my employees?
Is my mother going to be okay without me?
Who will provide for my children?
Building wealth can take a lifetime but losing it may only take a moment, or in the case of a global pandemic, a few weeks. These are uncertain times filled with emotions, times when people tend to make decisions on impulse rather than clear thought, hence the toilet paper shortage. However, it is times like these when many Americans may find they have no plan. Should something happen to you, where would your children go to school, who would financially provide for your family, and who would make the decision to remove you from life support? Furthermore, what if I told you “less than 2% of term life insurance policies ever result in a death benefit claim.”1
In my 15-year career in the financial industry working with families and businesses, the common theme that connects the people I meet is the lack of contingency planning, as many tend to plan for best case scenarios. The investment of time spent on creating an insurance strategy, ensuring it aligns with your trust and estate plan can help to alleviate emotional decision making during a time of duress. The global health crisis has spawned into a crisis of the economy, potentially leading to bread winners dying without a will, and people having to sell their investments when markets are lows. But what if you could provide yourself, your loved ones, and those dependent on you, assurance, a plan to navigate the worst of storms. For some, utilizing a life insurance strategy specifically designed for individualized needs may provide this assurance.
How Much is Enough
Most of the calls I receive regarding life insurance are from family members requesting information for a two or three-million-dollar insurance policy. Suggesting purchasers of life insurance conduct little analysis for their family’s needs. Life insurance can financially provide for your loved ones when you pass, provide a tax efficient wealth transfer vehicle, and transfer your business holdings to cash. However, life insurance can also assist in your lifetime to provide income during retirement, lower business taxes, and pay for your children’s college tuition.
Shopping for life insurance can be complex, and I recommend against purchasing from a life insurance agent, where employees of an insurance company sell the insurance products manufactured by their employer. Purchasing life insurance from a broker, however, allows the representative to shop the best coverage amongst multiple insurance carriers. Term life insurance policies that cover the life of an individual for a defined period provides a great supplement to a permanent policy, or an inexpensive way to purchase life insurance until the individual has the financial ability to purchase a permanent instrument. Although term life insurance is a popular option, it should be noted less than 2% of term life insurance policies ever result in a death benefit being paid to beneficiaries. While the cost savings is appealing, the actuaries employed by life insurance companies conduct complex calculations of the likelihood of you outliving the defined period, essentially betting on you to live.
Who Needs it, and Why
If you die today or become incapacitated, would your spouse or children be financially independent? Who would financially provide for elderly parents? Would your outstanding debt become a burden on your surviving family? Is there a former spouse that could interfere with your family’s inheritance? Is your death benefit protected against a divorced son or daughter-in-law? Do you have dependents that are irresponsible, suffer from a mental health illness or substance abuse?
With people living longer, we are said to be living in the “sandwich generation,” of having to care for children and aging parent. Many of the conversations I have with clients revolve around their family, and in most cases, who will financially provide for their parents in their absence or how to minimize taxes as they transfer their wealth.
Although a morbid conversation, those interested in life insurance should understand that we live in a time with access to great healthcare, and most people who pass prematurely are likely to live with a health ailment, such as heart disease or cancer before their demise.
“If there's one thing that's certain in business, it's uncertainty.”
Entrepreneurs and Business Owners
Life Insurance can protect against the loss of an owner or key person in a business. This includes business associates, be it a partner with whom you’ve started a venture or if you have inherited a business. Life insurance can help ensure your commitment should the unexpected happen. In addition, life insurance can be specifically designed based on your needs, for example an entrepreneur may need both disability insurance and life insurance, the amount depends on the structure of the business, the number of people involved, and the expected longevity of the business. Partnerships utilize life insurance to compensate the deceased family, as part of their business continuity plan, while others can utilize life insurance to lower taxes or further compensate employees with an executive compensation plan.
Debt can transfer to others, specifically to cosigners should you pass, under some circumstances tax liabilities may arise. For example, while federal loans can be discharged upon a borrower’s death, private loans, particularly with a cosigner oftentimes are not. Much depends on the terms of the specific loan involved. Additionally, when a loan is discharged, the canceled debt is viewed as income in certain circumstances, with taxes due. For a parent who has lost a child after cosigning a loan, they bare the loss of a child as well as having to repay the loan. Life insurance can be designed to pay off outstanding debt on the demise of the insured.
Although most may be familiar with leaving a legacy for their family and future generations, legacy planning can allow you to continue supporting causes important to you. In partnership with a sound estate plan, life insurance planning can help to provide charitable gifts in your lifetime and beyond. Allowing you to support a charitable cause, foundation, house of worship, university endowment and more.
Life insurance can be used to pay for burial expenses; however, it can provide greater value to those exposed to estate taxes. With a sound estate plan utilizing life insurance can help to minimize tax exposure.
“Uncertainty will always be part of the taking charge process.”
Harold S. Geneen
Life insurance is not the best suited investment strategy as it lacks liquidity in the early years and provides limited exposure to financial markets. However, it should come as no surprise the wealthy utilize life insurance to protect their assets and to invest in financial markets. Life insurance contracts can provide exposure to investment strategies utilizing complex options strategies, limiting downside market exposure, making life insurance a great addition to an investment portfolio.
The world of life insurance has greatly evolved in recent years, providing an opportunity to convert existing policies for policies better suited to your needs. I am sure your life and needs have changed, has your life insurance policy kept up with these changes?
“Happiness can be found, even in the darkest of times, if one only remembers to turn on the light.”
Disclosures: These are the views of the author, not Advisory Services Network, LLC, and should not be construed as investment advice. Neither Samra Wealth Management nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation
Scott, Wm. "The Life Insurance Industry's Big Secret". Huffpost.Com, 2020, https://www.huffpost.com/entry/the-life-insurance-indust_b_1937246. Accessed 12 Apr 2020.