In an August interview, investment consultant and founder of Greenwich Associates, Charles Ellis, talked about the power of marketing. To illustrate his point, he told a story about insurance. Founded in 1706, the Amicable Society for Perpetual Assurance, began to offer death insurance. It was the first modern company to do so. The founders, William Talbot and Sir Thomas Allen, strongly believed in their product but, according to lore, nobody would buy it. Of course, that was until they renamed their product life insurance, and it has been selling ever since.
Why Life Insurance?
Life saver floatingToday, few would debate the importance of life insurance. Among other things, life insurance policies create important financial safety nets. But there is still a lot of disagreement about how to choose the right policy and the right amount of coverage. Too many professionals try to determine these two factors by focusing on income, but it’s the buyer’s goals for life insurance that should be the true focus. And if goals are the thing, it makes sense to spend some time exploring what they might be. Here are some questions we use to begin exploring a person’s goals for life insurance:
- What are you trying to accomplish by buying life insurance?
- Do you want life insurance to help settle certain debts, for example, a mortgage?
- Do you want life insurance to cover final expenses?
- Do you currently have sufficient emergency cash reserves?
- Do you want to use life insurance to fund an education goal, for example, college or graduate school?
- Do you want to use life insurance to provide income?
If so, should that income help cover expenses until your children are independent, until the surviving spouse retires, or until the end of the surviving spouse’s life?
Letting Policies Lapse
Over the years, couples will fund most of these goals using resources other than life insurance. For instance, in our last issue of The Opening Bell, we wrote about college-education goals and how to pay for them. Most couples use some combination of income, savings, and student-loan debt to cover the costs of college. As each of the original goals for life insurance gets funded, there is less need for it. Over time, mortgages are paid off and retirement accounts grow. As these things occur, there may be strategic advantages in letting certain life insurance policies lapse. The premiums of lapsed policies can then be earmarked for other goals such as accelerating a mortgage payoff or finding money in the budget to pay for a long-term-care policy.
After we’ve figured out what our goals for life insurance are and decided on the right amount of coverage, we can start to look for the right kind of life insurance. Term life insurance is affordable and efficient, while universal life insurance is very flexible. Whole life insurance is rigid, but it can help reluctant savers to save. Variable life insurance policies are expensive, but have investment options within the policies. The quality of insurance policies varies quite a bit, too, so the work that follows finding the right kind of policy should be finding the highest quality policy. Working with an impartial life insurance specialist can help save a lot of time with this research.
Unlike certain aspects of a financial plan,
life insurance doesn’t call for an annual review. Thoughtful work at the outset usually stands the test of time. But occasional life insurance reviews are useful, especially during times of transition or rapid change. While these times tend to cluster around the time a person gets married or considers retirement, they can also happen anytime. If someone you know is in a time of transition, it might be a good time for some financial planning and an insurance review.