It is easy to become overwhelmed when buying life insurance.
It is also possible to go broke buying insurance. When an insurance agent is trying to sell you as much (and as complex) insurance as you are willing to pay for, simply remember that the primary purpose of buying life insurance is to reduce the financial risk associated with the loss of the spouse or significant other.
Remember the following reasons for buying life insurance. It does not need to be any more complicated than this.
Living expenses, college expenses, and debt settlement: For the spouse or partner, life without the other person will be hard enough. To help that transition, term insurance should be used to provide income for the spouse/partner, send the children to college and to settle all debts. Leaving the spouse/partner debt free is a great help in starting that new life under trying circumstances.
Estate liquidity: When anyone passes away, there are immediate expenses to settling the estate and making funeral and burial arrangements. To avoid the probable loss from the rushed sale of estate assets to cover these costs, a small whole life or UL policy purchased early on at low rates would help provide immediate liquidity.
The insurance agent will want to discuss the build-up of cash value in a whole life or UL policy as deferred savings or for future college education expenses, etc. as the primary reason for purchasing these types of life insurance. It is not. The purpose of the cash build-up is to pay for the policy in later years when term insurance becomes too expensive. The build-up of cash value in a whole life or UL policy is not an investment. Keep insurance services simple: insurance…is just insurance.
Agent competence and the stability of the insurance company: I encourage clients to find a reputable insurance agent who represents one of the better rated insurance companies. After all, you are betting that the insurance company will be there for longer than your lifetime.
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.