You see lots of advertisements for life insurance, on television, billboards and flyers in the mail. Life insurance sales are down. According to industry statistics, 57% of Americans have life insurance. But that means 43% of Americans have no life insurance at all. Industry group LIMRA reports that the number of Americans with individual life insurance policies is at its lowest level in over 50 years.
According to industry reports, because of this decrease in life insurance sales, many life insurance companies have expanded their product offerings, mainly into annuities. I suspect that that is one of the reasons that there seems to have been an explosion in the number of annuity peddlers in recent years.
When preparing their estate plans, most people want to control their property while they are alive and well, plan for them and their loved ones in the event of their mental disability and after they are gone, give what they have, to whom they want when they want the way they want. Life insurance can be a key component of your asset protection and wealth preservation planning.
Now, the first question is, “Do you have life insurance?”, which is followed by “Do you need life insurance?” Let’s cover some of the reasons why people have life insurance. This is not an exhaustive list and is in no particular order, but ten of the ones that we see on a fairly regular basis with our clients.
Income replacement. If you are a primary or other wage-earner in your family and your loved ones would have difficulty supporting themselves in the event of your demise, life insurance could provide an income for their support and general welfare. This is especially important to provide for other family members who may not bring home a paycheck, but do provide an invaluable service to the family, such as raising children.
Create or preserve an estate. If you have few assets and want to leave something to your loved ones, life insurance may be an option to create an estate. On the other hand, if you have a taxable estate, currently $5.45 million in 2016, life insurance can be a way to replace the assets used in your estate to pay federal and/or state estate taxes.
Pay off your mortgage and debts. With sufficient life insurance, you can leave your loved ones debt-free upon your death. Be careful before you sign up for mortgage or other credit life insurance with your lenders or credit card companies. The rates offered by lenders and credit card companies are typically significantly higher than you would get directly with an individual term life insurance policy.
Pay your final expenses and funeral costs. Life insurance is often used to cover your funeral and your final arrangements. In fact, many prepaid funeral agreements are financed with life insurance policies.
School tuition for your children. With some permanent policies you may be able to withdraw funds for your kids’ college out of the cash value of the policy tax-free and still maintain your insurance coverage. I have used this one myself to help fund our kids’ college education.
Emergency fund. Some people use life insurance as a backup savings in the event of emergency financial needs such as loss of a job or unexpected medical bills.
Sentimental policy from parents. You may keep a policy that’s fully paid up because it was a policy that Mom or Dad took out for you when you were an infant or child. Many of these policies do not have a significant difference between the cash value of the policy if you were to cash it in today and the death benefit, but you may want to hold on to the policies because they are from Mom and Dad, who are no longer with us.
If you have a business, there are also reasons the business may have life insurance on you or other key employees.
Funding a buy-sell agreement. You may have a business partner and have entered into a buy-sell agreement in which you and your partner have agreed to buy out each other upon death, disability or other triggering event. A life insurance policy may be an economical way to fund such a buy-out upon the death of a partner. Without life insurance, the surviving partner may not be able to afford to purchase the deceased partner’s business interest.
Employee benefit. Group-term life insurance can be a very economical benefit to provide to your employees. And if the group term life insurance amount is $50,000 or less, then it is tax free to your employees.
Key person insurance. If you or other key person dies, could you or your loved ones afford to fund the company operations until a buyer can be found or you find a replacement for the key person. With life insurance, it could take the pressure off of your family. There now would be cash to hire someone temporarily to manage the company upon your death until the company is sold. It could also take the pressure off of you if you lose a key employee, until a replacement can be found.
These are just some of the most common reasons over the years that we have seen our clients have life insurance. You may or may not have one of the same needs or you may have another need. You should consult with a qualified financial advisor who could help you in your particular situation to determine whether it makes sense or not and whether you can afford it. Remember also that when you are young and healthy, life insurance is much cheaper than when you are older and not-so-healthy and before you become so not-so-healthy that you become uninsurable.
By Matthew M. Wallace, CPA, JD
Published edited August 28, 2016 in The Times Herald newspaper, Port Huron, Michigan as: 10 reasons why you might want life insurance