Insurance Analysis

Of all the areas of financial planning, we find that life insurance has the largest gap between what is needed and what clients have purchased. Golden Trail Advisers believes in completing a needs analysis for life insurance before any policy is even considered. Some of the common uses for life insurance are:

For a family situation, the most common need is to replace the income of a family's income provider in the event of an early death. The most cost-effective way to accomplish this is through the use of term life insurance. Term life insurance is not always promoted by the life insurance agent because the compensation is generally lower for term life insurance than for other kinds of insurance. We advise families to carefully review their needs in order to best evaluate options for life insurance coverage.

Another use of life insurance is for estate planning. If you are going to have a taxable estate, life insurance in the proper trust structure can save you about half the value of the death benefit by avoiding estate taxes on that amount. This can help you get more money without tax into the hands of your heirs. This type of planning requires a lifetime commitment to paying premiums and administering the trust.

For business owners, life insurance can be a good funding vehicle for buy-sell agreements. Basically, life insurance is set up to pay for the buy-out of one owner upon his or her death. This enables the business to continue while the deceased owner's family is paid for his or her share of the business. Another kind of insurance for businesses is key person life insurance, which offsets the cost to a business of losing a key employee due to death.

For those who need additional tax deferral options and have maxed out their IRA and/or retirement plan, life insurance or annuities might be useful. These investment vehicles can be combined with retirement plans for businesses. In the right situation, life insurance or annuities can help you build your wealth over time. However, given the expenses and restrictions, we advise you to look at all of your options before considering life insurance or annuities as investment vehicles.

Some of the common terminology, uses and problems with life insurance are explained in the bullet points below:

 

When purchasing life insurance, you should know the difference between brokers and agents. Brokers have access to products from several (typically a dozen or more) insurance companies. By contrast, agents sell insurance products of one company and are usually prohibited from selling products from other companies.

Golden Trail Advisers offers life insurance brokerage services to find and buy the right coverage at the most competitive price for each client. In addition, we help clients find the insurance company that is best-equipped to handle any particular health conditions.

Second to die (survivor life) policies are sometimes used in estate planning situations because the estate tax is not due until the second spouse dies. The cost of second to die coverage is lower than individual policies for each spouse because second to die policies do not pay out until the death of the second spouse.

In between traditional term insurance and whole life insurance is a product called universal insurance. Universal life has traditionally been used as a savings vehicle in addition to a source of death benefit. However, it can also be set up at the minimum premium level that will keep the policy in force for your entire lifetime. The cost of universal policies is between whole life and term. If you need to have coverage in place when you die, universal life is usually the most cost-effective coverage.

 

When evaluating your insurance needs, avoid rules of thumb. Instead, you should work out your needs before you commit money to term or permanent life insurance policies. "Buy term and invest the difference" might apply to a family with temporary insurance needs. However, the estate plan would have a huge hole in it if the term policy expires before the individual dies, leaving him or her without coverage.

  1. Young families might have too heavy of an emphasis on permanent insurance, rather than term insurance. This diverts money from the death benefit where it is most needed, to long-term savings. The result can be inadequate coverage.
  2. Assumptions about the future cost of insurance in a “permanent” policy are underestimated. This can force a choice between paying a higher premium or letting a policy lapse.
  3. Improper advice causes a death benefit to come back into the estate even after the client thought he or she had removed the policy from the estate.
  4. Businesses that set up life insurance for a buy-sell situation do not always draft the appropriate legal documents. The result is insurance money for the surviving business owner(s) with no obligation to buy the shares from the deceased owner’s family.
  5. Loans against cash value can cause a policy to lose value exponentially when a client lives longer than expected. This can be a drain on resources.
  6. Accumulated cash value falls short of projections, so clients terminate their policies after many years of paying expensive premiums. The result is term insurance coverage at permanent insurance prices.

 

With so many alternatives and different variables, life insurance policies that seem appropriate may have hidden problems. Golden Trail Advisers can help you review your existing coverage and plan for your future needs so that you avoid problems. Life insurance planning is just one way we help you on "your path to financial well-being."

Insurance Analysis