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10 / 15 / 2019 by Greg Freyman, CPA in Insurance

Financial Planning – Do I Need Life Insurance?

Benjamin Franklin is believed to have said, “If you fail to plan, you are planning to fail.

This tax blog specifically deals with our views on the topic of life insurance.

As we explored the beautiful island of Bequia (pronounced Bek-Way) post-tax season 2017, Angie and I both found ourselves driving to meet the sunrise one beautiful morning amid our 7-day stay. How romantic, right? In most ways, yes, although we still answer business phone calls and run payroll errands all while tucked away on a fantasy island getaway. The role of being small business owners is something we have now become accustomed to regardless of our geographic location — thank goodness for WiFi. We are perfectly fine with this responsibility and take it quite seriously. When we committed ourselves to our clients’ needs, we knew all that it would entail.

Back to our story, I remember it as if it were yesterday morning; it was still dark out and quite early. We grabbed the coffee mugs in hand, and we were off to greet that great big ball of fire in the sky. To cast blame on our sleepy pre-coffee conditions, we were heading the completely wrong way to meet the sunrise, and I realized this as the rays of sun started to appear in the rearview mirror. I exclaimed to Angie, “we are heading the wrong way!” the sun rises from the east, we must be heading west! Holy moly, ok, now for those not familiar with this very volcanic mountainous island, Bequia is all hills and sharp drop-offs with nothing protecting you from falling right off of the cliff to your death. Do you see where this is going now? Great, if we have your attention this far, we will have you buying life insurance in no time, just kidding, follow along, it is about to get interesting.

So here we are; in need of a quick 180 to go head east. Like most undeveloped islands, the streets there were very narrow, so I found the first left I could make and commenced to turn around. The way I make a turn was to turn into someone’s driveway, which was very much uphill, picture something like a 45+ degree slope. I go up, and as I back out, the coffee mug held in my lap without the use of my hands spills scalding hot coffee all over the most sensitive of areas known to man. Embarrassing and funny now, but it was not so at the time.

I jerked like a horse slapped on the rear end, and before I knew it, I screamed from complete shock, my foot flooring the gas pedal. We went left and impacted into a border on the side of the road. It all happened so fast that there was no thought process involved at all; it just happened. We banged up the car a bit, nothing major, and of course, I had received first degree burns. The thing that dawned (no pun) on us afterward was that the island had no borders on most of the roads perked high, and as I said, on most of the island the only thing between you and going off the cliff is thin air. We were very fortunate to have been in a location that happened to have a barrier to protect us from going off and perishing.

Angie rushed me to the hospital, which, to my luck, was open that Sunday. They admitted me right away, which I thought was a blessing, though I did not feel it is fair as I skipped a long line of some pretty sick looking locals. I guess my injury was the worst that day, so they rushed me ahead to see the medical team.

There I was laying in the emergency room stretcher bed. The nurse was fast to attend to me. I was pale and still very much in shock from all that had transpired. I asked the nurse as if I was a soldier dying on the battlefield, “tell me, how bad is it?!” She looked it all over quickly, not thinking anything of it and with a smirk, she wittingly replied, “you get use out of it yet mon.”

Moral of the story: life insurance and estate planning is essential for everyone. Had we both perished in one incident, this would present many unique challenges to our loved ones left behind. Please see our next blog on this important topic.

 

A Professional’s Role

Have you ever heard anyone exclaim, “I have been with my CPA for 20+ years”? There is an excellent reason people say such things. Clients entrust their most sensitive information dealing with various aspects of their lives, from marriage to childbirth, change in residency, and more to the tax and finance professionals.

Each financial professional should strive to make the most of being positioned in such a manner. The expert will help ensure the client achieves success in various aspects of their lives.

Many a time, people avoid speaking or even thinking about having a final will in place, and even more so, avoid the topic of adding insurance where not mandatory. Many see these topics as taboo, as they refuse to face their mortality and may see adding life insurance as an additional unwarranted annual cost.

By avoiding will and estate planning topics of discussion with their financial planners, people could not be more “dead wrong” (pun intended).

Everything is peachy keen until a family member passes without a valid will in place and/or carrying proper insurance coverage. The family members are then basically left unprepared and are forced to scramble through a myriad of newfound financial dilemmas.

 

Why Life Insurance?

Part of tax and financial planning is to review many aspects of an individual’s life, and that will include a review of all insurance coverages, including life insurance. It is typical for an insurance discussion to take place at one point or another between the client and the professional.

You would be surprised as to how many people neglect to have the right kind of coverage for their specific life and financial situations, so when the conversations do arise, mainly about life insurance, some will proudly exclaim, “I have life insurance through my employer.” Some may feel as if the employer coverage is enough coverage, but the fact of the matter is that it is typically not enough coverage even if the employer offers more than a standard group-term life insurance policy for $50,000. From others, we may jokingly hear something like, “I do not believe in life insurance” as in, they feel that signing up for a life policy will jinx them and a piano or an anvil will fall on them as soon as they cross Fifth Ave the very next day.

We should be careful not to generalize, as not every individual has a direct need or is qualified for life insurance coverage, however, in most situations a person with a family where they are in whole or in part financially responsible for, have a substantial need for proper coverage.

 

How Much Life Insurance Coverage Should One Obtain?

Take a bit of an extreme example: a family of four consisting of the leading provider with two children and one non-working stay-at-home spouse. The children are ages 14 and 6. The wage-earner has an annual salary of $65,000. The family relies entirely on this source of income for their survival; and in this scenario, there are no other sources of financial security besides the $65,000 per year.

For these two children to reach full financial independence can take anywhere from 12 – 20 years from today. How quickly each child can stand on their own two feet would depend on their unique abilities and personal circumstances, which may not be currently apparent.

There is no sure-fire way of calculating the exact amount of death benefit one should apply for or will be approved for, as there are many variables at play. A well-rounded life insurance professional should have a holistic approach and can help quantify an amount. The experienced agent will consider the applicant’s entire financial picture, future outlook, and other essential factors before making a recommendation.

In the world of financial planning, there are some industry general “rules of thumb” you can use as a general guideline. Understanding the basics will allow you to come in more prepared for when you are ready to shop for life insurance.

 

Rule of thumb No. 1: Multiply your annual income by 10 for each dependent (do not include your pets, guys).

Rule of thumb No. 2: Buy ten times your annual income, plus $100,000 per child for college expenses.

Rule of thumb No. 3: Analyze costs more closely using the DIME formula.

Debt and final expenses
Income
Mortgage
Education

 

The Two Flavors of Life Insurance

1. Term Life Insurance

Term life insurance is not a permanent solution and is best suited for a “short term,” as in 20 or 30 years from the policy start date. This form of protection is excellent for people with young children or temporary needs, which can range anywhere from:

A healthy individual can receive a very decent amount of protection/coverage for a minimal monthly premium.

 

Financial Planning Tip: You can combine a term policy with a permanent one.

 

Provisions of term life insurance include:

 

Limitations of term life insurance may include:

 

Examples of term insurance policies:

 

2. Permanent Life Insurance (Perm)

As the name implies, “permanent” life insurance is designed for the individual’s entire lifetime. It is a more costly type of coverage than the term insurance policy option as it will run for as long as you are to live, be that 120.

 

Examples of permanent insurance policies:

 

Important Note: If you take away one thing from this article, it would be that insurance is best to underwrite during the appropriate ages, for instance, life insurance is best at the earliest age possible, even in adolescence, while something like long-term care insurance is best suited to start in your 40’s.

 

There are many aspects to life insurance, and a policy can help you plan for many life events down the road.

 

Examples of possible uses of a permanent life insurance policy include:

 

Financial Planning Tip: Some permanent life insurance policies are utilized as investments as they have built-in investment components, much like individuals investing in the stock market. The caveat is that one may earn a higher rate of return on their own.

 

 

I’m no Spring Chicken – Is Life Insurance Right for Me?

We were wondering the same thing and have interviewed high and low as we dug around for some answers.

According to Mr. Sam Price of Assurance Financial Solutions, the following would be a few things to consider for older generations:

 

Other Considerations

Business owners concerned with shielding a portion of their assets from lawsuits: Cash in a permanent policy is locked down from trials so long as personal income was used to pay premiums.

Special Needs Trusts: Adults with special needs children may consider to lock some life insurance for the protection of the child after the parents/guardians are gone. Life Insurance is the funding vehicle for the trust.

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