Life Insurance - Most people own it, but do they really understand it?
Life insurance may be the most complex financial product in existence – but why should this matter to you?
Less than a year ago, we received a call that a good friend had just suffered a massive heart attack and was in open-heart surgery. By God’s grace this man is fully recovered and thriving. However, when my husband and I went to see him in the hospital, he immediately started asking questions about how to get his business in order. He said the only thought he had while being care-flighted was the fact that he had not been a good steward of his success and his family would suffer because of it.
Now, just imagine you were the one on that flight…What would be some of the first thoughts to consume your mind? That everything and everyone would be taken care of? Now imagine you were granted the time to put your house in order only to learn that your life insurance would not outlive you.
That is what I would call “a nightmare.” However, it may be all too real for far too many.
Let me preface the rest of this commentary by telling you that there has never been an instance in which a life insurance claim that was current and abiding with the contract that was not paid. You and I both know if that day came, no one would ever buy life insurance again. Life insurance is a contract to pay a claim at the time of your death, and it does and will continue to do this.
However, and this is a big however, the big print giveth and the little print taketh away. We no longer live in a world in which there is one simplified type of life insurance - there are often other needs for life insurance. We are presented with many types of life insurance, with a multitude of bells and whistles and options that can be included on a policy. In some respects, it may be the single best solution for a number of issues. I don’t know of any other product that can single-handedly create asset protection, tax-deferral, and potentially a tax-free benefit in life or at death. It can give a family time to grieve, make wise decisions, pay debts and taxes owed to Uncle Sam, and income to live on. It certainly has an important place in a family’s plan.
Yet over time, life insurance companies have become adept at transferring as much risk to you as they can. Last year we started working with a successful couple in their fifties. They had just purchased two permanent policies which they expected to be, well, permanent. We reviewed these polices and found out they were permanent as long as they died before they turned 83. They had no idea that was the case.
So just like your investments, your insurance needs to be reviewed on a regular basis - we would suggest annually. This means you will be better able to understand it, or at the very least, have a trusted advisor that does. There is an often used phrase in our business that states it is not always about getting the right answers - it is about knowing the right questions. How do you know what you don’t know?
If you are buying term insurance, is it convertible? Fully? Partially? Temporarily? Convertible to what products? Renewable? What is the difference? Why does it matter?
If you are buying permanent insurance, what kind is it? Is it really permanent? What is the difference between guaranteed and non-guaranteed? How could interest rates effect your policy? How could the markets effect your policy? What can change in the policy makeup that would affect you? Can the cost of insurance or administrative charges go up? How likely is your policy to perform the way it was shown to you? Could you end up paying more in the future? Is there a different way to accomplish the same goal, and have these options been weighed? What about the strength of the company? Is the company mutual or traded? Is it a captive company? What does that mean?
This is just a sample of the questions that need to be asked. We are talking about what is perhaps one the most complex financial instrument in our lifetimes. And depending on your unique situation, family dynamics, goals, and risk tolerance; there are many, many more “unknowns.”
The bottom line is this: There is definitely a place for the amazing benefits that only life insurance can offer. However, this is one job you most certainly do not want to do alone. Whether you have old policies, new policies, or need a policy - you need an independent set of experienced eyes to help you.