Life Insurance

The purpose of life insurance is to provide resources at your death for the people who rely on you. Sometimes it replaces the earnings or savings you haven't had time to earn. In other cases, it gives your family breathing room to reorganize assets. We often see it used to pay taxes or obligations so your family receives your assets unencumbered.

No matter why, life insurance is an important consideration in the planning process. There are many types of life insurance; some permanent, some temporary. A large part of the decision process is about what happens if you don't need it.

Another reason for examining your insurance situation is that either your situation or the circumstances of your existing policies may have changed. In the former, children grow-up, retirement reduces the need for income replacement or a new business or new debt needs to be covered. We consider all that as part of initial and ongoing conversations.

The latter can be a little trickier. Insurance companies went through the same financial turmoil as everyone else over the last 12 years. The interest rate assumptions built into older contracts may have been difficult to achieve. Discussing this with your agent is a good idea. If you haven't seen him since you bought the policy, we can ask the insurance company for an in-depth analysis of its viability. This isn't meant to cast aspersions at the finances of your insurance company. We just want to know if the earnings assumptions are still realistic.

The easiest way to explain cash-value types of life insurance is that they are a savings plan that works whether you make all your contributions or not. Let's say you are starting from zero and want to have $1,000,000 in investments when you retire in 20 years. At 5% the calculator says you need to save $2,433 a month to hit your goal. The problem is; you need to make 240 payments. If you don't, your family doesn't reach their retirement goal either.

Enter life insurance. The savings plan is the same. The insurance company knows that some people will live longer than others so with enough customers they can calculate how long it will take to build up the funds. Then they add in a premium for the possibility of having to pay out benefits early and a little extra for their effort and set a competitive rate.

If you read my opinions on Financial Planning you'll recognize that the earnings estimate is as much a guess as how long someone will live. In the investment business we have to constantly evaluate the earnings potential of your holdings. Not so with an insurance policy. In the initial illustration you usually get two columns of figures; what it is paying now and a guaranteed minimum rate.¹ It extrapolates those rates to suggest how many payments you will need to make to "pay-up" the policy in both cases. With interest rates near historic lows, many policies have been paying the minimum for years - even though the policyholders are operating on the more optimistic assumption. The insurance company has to send annual statements showing the earnings but they are under no obligation to tell the owners whether they are on track or not. So people stick the policies in the same drawer with the rubber bands and microwave instructions and forget about them until they get a bill saying the policy needs more cash to stay afloat.

Insurance companies are glad to supply you with detailed reports on the viability of your policy just for the asking. Just bring your policy by. We'll request a current evaluation and can analyze it for you when you get it back.

¹All policies are different and disclosure requirements vary from state to state and from year to year. 

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Guarantees are based on the claims paying ability of the issuing company. Please keep in mind Insurance companies alone determine eligibility, and some people, for their own health or lifestyle reasons, are deemed uninsurable.