 | | | Lynn Ballou is a Certified Financial Planner. Information used in the writing of this column is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subject(s) discussed. All information is derived from sources deemed to be reliable. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. | | | | | | When we ask clients what matters most to them, typically it's a tie between enjoying their life without worry that they'll run out of assets, and making sure that they leave their family and heirs well provided for. An important part of the conversation should include possible life insurance coverage. In this column, let's explore some reasons that despite the bad rap that life insurance often receives, if well thought through, the right policies in your arsenal of financial tools can make a profound difference to you and your loved ones.
1) I am still in my earning years. If that's the case, your biggest asset may be the money you have yet to earn, and the family commitments and promises that come with that. Paying the taxes, paying the bills, paying for college, paying off the mortgage, having cash on hand to deal with the stress of loss and the rearranging of the family life - these are the primary reasons that working parents purchase life insurance on one or both spouses. Even if one is a stay-at-home parent, replacing all the services that spouse provides to the family while allowing the other to stay focused and continue in their career comes with a price tag. All of this should be taken into account when determining if your family needs this coverage.
2) I have a blended family. Typically parents in blended families worry a lot about fairness. For example, what's fair to the biological children of a parent who dies first if the assets are left for the second spouse to use for the rest of his or her life? It's sometimes not practical to leave an inheritance outright when we pass away if our spouse would lose the financial quality of their life. This is a compelling case for purchasing a policy on the first to die. Similarly, if there is a decent age spread between the spouses in any family, the older parent may wish to leave a legacy to the children that comes to them before the other spouse also passes on. Life insurance can provide the liquidity to leave these legacies without giving away assets needed by the surviving spouse.
3) Long-term Care. Long-term care insurance has become difficult to find and difficult to afford as stand-alone coverage. Recently we've seen an increase in the number of life insurance policies that include riders which allow insureds to tap into benefits for long-term care needs before death. Hybrid policies such as these are not inexpensive, but the peace of mind that they might provide to those looking for multiple benefits should not be dismissed without consideration.
4) Charitable Intent. Many clients have what end up being conflicting estate planning goals: Leaving sizeable inheritances for loved ones and leaving meaningful gifts to favorite charitable organizations. For a variety of reasons, you may not actually leave a large enough estate to solve both goals. Purchasing a life insurance policy for the purpose of funding charitable gifts could be a good solution.
5) Assets that are hard to split. We see a lot of clients who have a cherished family vacation home or other illiquid assets that may be impractical to leave to multiple heirs. For example, what if there's one Monet and three heirs? If that represents the bulk of the estate, how do you split it? Life insurance can solve that problem and allow the asset to be donated, the cash to go to the heirs. Or if agreeable to all heirs, one inherits the family vacation home, for example, and the others receive the cash from the insurance proceeds in an equalizing amount. In these cases it's advisable to have family meetings before we pass on to be sure everyone's on board with the plan. Otherwise you can leave future generations in a world of emotional shock, hurt and turmoil.
As well as determining the amount of coverage needed and the most affordable and appropriate way to obtain it, there are three additional issues to think carefully about when purchasing life insurance: the type (whole life, term, variable are examples), the estate taxation and income tax ramifications, and the term or time of coverage. When including life insurance in your planning, be sure to collaborate with your CFP, your tax advisor and estate planning attorney to be sure these and all aspects are thoroughly considered.
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Lamorinda Weekly, Moraga CA