What Life Insurance Is…And Is Not
The biggest pothole in insurance planning is to treat life insurance as an expense rather than as a long-lived asset to be managed.
Life insurance… is insurance. It is insurance against the financial risk associated with the loss of the spouse or significant other. This financial risk comes in many forms. The most obvious form is the loss of income. This in turn means the inability to pay debts including the car payment, mortgage, or school loans as well as a diminished ability to save for major car or house repairs, children’s college tuition, and retirement. Obviously, these risks change over time depending on the life cycle of the individual and family.
One size definitely does not fit all. Financial risks also vary depending on the living arrangement: husband and wife with children, single father or mother with children, remarried spouses with a mix of children, single people with no children, and committed domestic partners with and without children. Know that later in life, along with providing for children, you might be caring for dependent parents. Life insurance… is not an investment. The build-up of cash in a whole life or universal life policy is not why the policy is being purchased —although it usually figures prominently in how such insurance is sold.
For clarity, here are the drivers sharing the insurance highway.
On one side of the highway are the:
Insured: the person whose life is insured;
Owner: the person or entity owning the insurance policy;
Beneficiary: the person or entity who receives the benefits of the policy on the death of the insured.
On the other side of the highway are the:
Insurer: the company writing the insurance policy;
Agent: the representative of the insurer who sells the policy to the owner on behalf of the insurer.
Wipe-outs can happen on the insurance highway when the wrong kind of insurance is bought not just when too much or too little insurance is bought.
Scott Anderson, CPA, CFP®, EA is the CFO and Vice President of Tax Strategies for GW Financial, Inc. He earned his MBA from Stanford University. Scott has spent over 35 years in corporate accounting and finance, including experience with several entrepreneurial opportunities in venture capital startups and corporate turnaround situations. He has served as Chief Financial Officer for two emerging public companies and has his own active practice in tax, financial, and investment planning for individuals and small business owners.