An Experts' Tips on the Worth of Life Insurance

What's the most important factor individuals should consider when determining if life insurance is worth it?

The most important factor that should be considered when determining if life insurance is "worth it" is your needs. As with most things in life, life insurance needs to fluctuate based on your life stage and specific circumstances. For instance, an individual just starting their career journey may not have a current need for life insurance because they don't have anyone dependent on them for their income. However, this same individual may be able to purchase a significant amount of individual life insurance at an affordable cost through their employer as an employee benefit, thus providing coverage in the future at a lower cost if needed. A determining factor could include that life insurance costs increase with age, and there's always a chance that the individual experiences health issues, potentially qualifying them as "uninsurable." So, while there may not be a current need, securing individual life insurance coverage that is affordable and available to fill a future need is an important consideration.

Another common scenario where the “what if” need is often overlooked is for entrepreneurs of any age. For this scenario, assume the individual has a young family and carries adequate personal life insurance coverage to pay off existing personal debts, partial loss-of-income replacement and even future college costs for the children. This individual then decides to start a business with a partner and acquires large business debts. What happens if either business partner dies without assessing their life insurance needs (as well as disability, business overhead expenses, partner agreements, etc.) as business owners? With adequate life insurance, if you unexpectedly die, your business partner would have the funds to buy out your share of the business, providing additional assets for your loved ones.

In both instances, it’s extremely helpful to work with a financial planner to help determine first if there’s a need but also to assess the best insurance-type fit as well as affordability. While many apps, AI platforms and even insurance agents are available to look at each of these considerations separately, it would be difficult to determine an optimal fit without looking at your entire financial picture as a financial planner would.

How can individuals leverage life insurance to enhance their estate planning objectives?

The ultimate benefit of life insurance may be that it can be used as a tool to enhance estate planning objectives. You can think of life insurance as a tool to protect your legacy. Individuals, couples, small business owners or trusts use life insurance in estate plans for many reasons. For example:

• Burial policy: purchased to minimize the often-unexpected costs of saying goodbye to a loved one.

• Debt repayment: This is typically the first reason life insurance is considered. This could help a partner remain in the family home, prevent excessive credit card debt from being the responsibility of families, allow a business to continue to operate or even anticipate the benefit being used by an heir to pay off their debt.

• Income replacement: While life insurance should never be viewed as a replacement for a person, the financial impact of losing someone’s contribution to household income can be minimized.

• Funding buy/sell agreements: These are more specific to business owners and are integral to any multi-owner or partner business. They can be utilized to pay off business debts, help prevent unwanted (and unplanned) family members from becoming owners or even provide funds to find a future partner.

• Legacy: Individuals may have pre-paid burial expenses, not have debts to pay off upon their death and do not have anyone dependent on them for their income, but they still need to establish a legacy. This legacy can be for their families, charities or a combination of both.

In developing a comprehensive retirement income strategy, how can life insurance be effectively integrated?

A great example of how life insurance can be effectively integrated into a retirement income strategy is commonly referred to as a "pension-max." In this scenario, a married individual is retiring with a company or government service pension (a guaranteed income source) and has to decide before retiring which pension payout option best meets their needs, forcing an irrevocable decision. The highest amount you can receive is based on a single life expectancy; however, you know that if you pre-decease your spouse, the loss of this income source would potentially be devastating, especially for a one-income household.

In comparing what other options would cost (options that would partially or fully cover your spouse if needed), you may feel that you would potentially be giving up too much income. This situation often leads to a conversation with a financial planner regarding what could potentially be used to offset the loss of income should the retiree pass first. The financial planner may suggest using life insurance to cover the income gap that would occur. Caution is needed when considering this sophisticated strategy, as not only life insurance is needed but annuities as well. It's important to note that permanently renewable life insurance (which is costly) should be used because term insurance, which ends after a set period of time, may expire before being needed.

What are some of the limitations of life insurance, and how can one navigate around these issues?

The limitations of life insurance are tied to its lack of flexibility and increased cost as your needs change over time.

• For permanent life insurance, you may not be able to afford the amount of life insurance you need.

• Life insurance is expensive if you’re older or develop a chronic disease or disability.

• Traditional life insurance may not be accessible if you need to access the funds for long-term residential care.

• Depending on the insurance company you selected, your loved ones may struggle with the claims process.

Disclosure

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This material contains only general descriptions and is neither a solicitation to sell any insurance product or security nor intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. Guarantees are based on the claims-paying ability of the issuing company.