Is Life Insurance Worth It?

The purpose of insurance is to protect yourself and your loved ones from unexpected obstacles or events.

As an unbiased, fee-only, and holistic financial planner, I don’t sell any products or receive any compensation beyond what clients pay for investment management and financial planning. I kept my insurance license when I became a fee-only planner so that I could provide objective consultation on insurance. Routinely I discuss home, auto and health insurance with my clients.

In addition to those, these are the types of insurance I most often evaluate for my clients, because they address the risks my clients are likely to encounter:

• an accident or illness that keeps them from being able to work (disability)
• a liability event where the injury or property damage exceeds regular insurance limits (umbrella)
• the need for extended assistance with daily activities, most often due to aging or chronic illness (long-term care)

Life insurance

To evaluate if life insurance is worthwhile for you, consider if you have a true economic risk. Life insurance should be used to cover economic responsibilities that survive death, to the extent that they cannot be satisfied out of assets.

Is your household dependent on one breadwinner to meet household expenses? Then at a minimum you need to have 10x his or her income in term life insurance coverage. In addition to economic responsibilities such as a mortgage, consider future financial goals such as your child’s college education, if that goal is currently being funded over time with income.

Alternatively, if no one is depending on your income then generally you require little or no coverage.

Are you a family with a Special Abilities child? You have different needs when it comes to protection planning and need to make sure you have identified insurance gaps and designed strategies to protect your loved one. This applies to disability insurance and long-term care insurance as well.

Finally, any conversation about insurance needs to start from an awareness of the two sides of money. We have our thinking brain that evaluates trade-offs like risk and return, optimal tax strategies, retirement account withdrawal rules, etc. We also have an emotional brain that fears financial loss and hopes for gain, remembers instances of spending or earning behavior that was misaligned with our core values and left us with feelings of regret or shame, and yearns to provide and protect those we love. Both sides are equally important and complex, but it is the personal side that drives decision-making.

Are there other reasons to consider life insurance?

There are estate planning objectives that can be met with life insurance, such as providing immediate cash for estate taxes, debts, or funeral costs without selling assets quickly to cover these costs.

Another reason is to provide equal inheritances when the family’s assets are tied up in illiquid investments such as a family business or real estate, which are not easily divided.

Some people want to leave a legacy gift to provide financial security to a loved one or to make a charitable gift, but don’t have significant assets to satisfy their desire. They purchase life insurance to be able to pass on a substantial inheritance.

For those with minor children or beneficiaries for whom it would not be a gift for their wellbeing to receive an inheritance all at once, trusts are created to manage and distribute the inheritance according to the benefactor’s wishes and life insurance proceeds can be directed into a trust.

Other considerations

Permanent life insurance can be more expensive than term insurance, and the various riders, fees and investment options can make it hard to understand the true costs or do apples-to-apples comparisons of proposals. Clarify the economic risk you are exposed to and weigh the policy’s value for its insurance benefits rather than as an investment vehicle.

A life insurance policy needs to be safely stored for the long term, and protected from fire, flood, or another calamity. Make sure your loved ones know where to find the policy documents.

Avoid the common estate planning mistake of not keeping your beneficiaries up to date.

Many people view life insurance as a way to protect their loved ones, and it is common for those who are designated as your beneficiaries to equate this action with security and being valued. It can be hard to objectively evaluate policies because of this emotional piece, and that difficulty is intensified when you are getting advice from someone who is trying to sell you a life insurance policy. My advice is to find a fiduciary financial planner who will provide a comprehensive, objective review and analysis of your risk exposures and insurance coverage.