Get ready for this—the life insurance industry is planning to target all of us.
I’ve just been looking at a new study from the insurance research firm Conning, which says pressures are weighing on the life insurance industry to innovate and use technology for such purposes as mining customer data. Soon you might be receiving a sales pitch about some new kind of policy designed with you in mind.
The study, titled “InsurTech and Other Innovation Drivers: Life Insurance Starts to Catch Up,” started me thinking about all the conversations I’ve had with clients that have revolved around who needs life insurance and when.
Now, with policies becoming ever more precise, it’s especially important to understand when you need it and when you don’t.
No doubt you’ve heard the argument that the main purpose of life insurance is to replace your earnings, so that if you should happen to die while your children are still young they’ll be protected. Your survivors can use it to pay off debt, fund college and replace much of what you are not there to provide. You know, the cost of living.
Once your kids are grown up and on their own, there’s less reason to have life insurance, right? Well, maybe……
When those responsibilities are behind you, it might be appropriate to cut back on the expense of life insurance premiums and channel that money to your nest egg. For many, this is completely appropriate and proper.
In the past people sometimes held their life insurance in a trust to keep it out of their estate, so that their heirs could use it to pay estate taxes. But with the current iteration of the federal estate tax law, which exempts the first $11.4 per individual benefactor and $22.8 million per married couple in 2019, fewer people need this planning tool.
Nevertheless, there are a few situations that might present a good case for holding on to a life insurance policy. Here are four that I run across fairly often with my clients:
- A special needs trust. If you have children who will need your support as adults, you can use a life insurance policy to continue funding a special needs trust for them after you are gone.
- A trust for other reasons. You can also use life insurance to fund a trust for children if you don’t want to leave them money outright, whether it’s because they’re too young or because they just aren’t likely to handle it responsibly.
This is another tough situation that happens in families; there might be adult
children with drug addiction or mental health issues, or who just aren’t comfortable
with making important financial decisions.
- A spend and replace strategy. If you are a couple with a reasonable expectation that one spouse will live much longer than the other, based on mortality tables, health history, and family health history, you might consider maintaining a policy on the spouse who is likely to die first. In some cases, each spouse might maintain a policy to provide for the other.
Then you can take the approach of spending down your assets for your needs with knowledge that the surviving spouse will be able to live on the insurance.
- Funding your legacy. Leaving a financial legacy is important to many people, and life insurance can guarantee that legacy without cutting into your spending. It can be used to leave a gift for a charity, your alma mater, or any other cause that is important to you. Leaving a financial gift can also be aimed at children or others who are important to you.
When you’re looking at the kind of life insurance that might provide for your family or your legacy, there is also the matter of choosing from the growing plethora of products. There’s whole life, universal life, adjustable life, and term life—and those are just the basic classifications.
Within each type of policy comes another set of options and choices. For example, you can buy a policy that is based on interest rates or one that is based on investment choices within the policy.
These are permanent policies that build up cash value. When examining permanent policies, however, you need to understand how long the value is guaranteed and what type of dividend options are available.
Or you can buy term insurance, which costs less than permanent policies but expires at a certain point. Here you need to determine how long you will need to keep paying premiums. If you knew when you were going to die, the product choice would be simple, but of course that just doesn’t happen.
While the concept of insurance is simple, a policy is a contract and therefore loaded with a lot of verbiage that is guaranteed to put you to sleep. Make sure you get complete and straightforward answers to your questions in writing.
Insurance companies are in the business to make money. They are betting that they will take in more money than they are paying out. Agents are typically compensated by commission, so ask them about how they are paid so that you’ll know when they have a motivation to sell more expensive policies.
Be clear about your needs before you investigate. Don’t get sucked into buying something you don’t value or need. Life insurance can fill some important needs, but it’s not for everyone.