Deiss, CFP®, AEP, Wealth Advisor
by Deiss, CFP®, AEP, Wealth Advisor

CFP®, AEP, Wealth Advisor

In addition to investment management, insurance is a critical component of your financial plan, whether you consciously think of it this way or not.

You’re likely already paying for insurance (health/medical insurance/prescription drugs, homeowners, auto, etc.), but you also don’t really have much of a choice not to have this essential coverage.  You typically can’t get a mortgage or drive a car without proper coverage, and most people who can afford it don’t want to take the risk of incurring catastrophic medical expenses.

When it comes to life insurance, it’s easy to get distracted from what’s needed given the variety of policy options, their complexity, and a general lack of transparency.   There are no stores or showrooms to visit and shop for life insurance.  And there are no standard benchmarks, like the Dow Jones Industrial average or the S&P 500, to use to compare one policy to another.

Just like your investment portfolio has a purpose, so should any life insurance you own or are considering to purchase.  The basic purposes are as follows:

Income Replacement – used to meet immediate obligations and sustain a household’s annual income needs if a primary earner dies, to pay final expenses (funeral, medical, etc) or to eliminate debt or fund beneficiaries’ tuition payments.

Estate Liquidity & Wealth Replacement – historically used to provide liquidity to pay for estate taxes due at the death of the second spouse and to replace family wealth lost to estate transfer taxation.  More recently, it may be used to replace income taxes IRA beneficiaries will have to pay due to loss of stretch IRA provision (i.e., no more taking minimum distributions over their life expectancies).

Estate Legacy & Equalization – leaving an inheritance to heirs or other beneficiaries (or a charity) and/or to provide a legacy to certain heirs whose siblings may be receiving other assets (i.e., an operating business).

Business Continuation:  Key Person – Buy/Sell – used to protect shareholder or partnership interests or to guarantee business loans.

The two primary types of life insurance can be considered temporary (“Term” insurance) or permanent (“Whole Life” or “Universal Life”).

Term insurance provides a death benefit for a specific number of years (typically between 1 – 30 years).  Permanent insurance is typically designed to provide a death benefit to your life expectancy or beyond.

Here is a general break down of the general contract types most commonly associated with the above purposes.

Term Insurance– used to meet immediate obligations and sustain a household’s annual income needs, to eliminate debt for a surviving spouse and family, and to fund beneficiaries’ tuition payments.

Permanent– Estate equalization and/or to provide liquidity to pay for estate taxes due at the death of the second spouse and to replace family wealth lost to estate transfer taxation and, more recently, to replace income taxes IRA beneficiaries will have to pay due to loss of stretch IRA provision (i.e. no more taking minimum distributions over their life expectancies).

You’d typically need permanent coverage to pay any final expenses.

Term and/or Permanent– used to protect shareholder or partnership interests or to guarantee business loans.

If you have insurance policies today, consider why you originally purchased them.  What was the purpose? Does the policy still fulfill this purpose?  Or have my needs changed?  These simple questions can help you to determine what to do with them.

If you are considering life insurance, then keep the purpose in mind and look for a policy type that fits that purpose.  Beyond this, look to work with someone who is independent and represents multiple carriers offering different policy types.  And, if you have any questions, reach out to your ACM Wealth Advisor who has the resources to help you choose wisely.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.