Making Cents: The Run Down On Life Insurance
By: John P. Napolitano, CFP®, CPA, PFS, MST
You may not have known it, but September is life insurance awareness month. Life insurance is a tough topic to promote because many people don’t want to discuss their own demise. But if your lack of adequate life insurance would leave a financial shortfall for your family, business or debt service – pay attention.
Start by defining the need. There are plenty of calculators online that will tell you how much life insurance that you should have. Of course, any financial planner or insurance agent should be able to answer this also. I’ll warn you in advance that the calculators are likely to show a number much larger than what many may anticipate.
The facts that go into the calculator include your cost of living, the family’s income after your passing, assumptions about inflation, earnings on investments and special funding needs like educational expenses, or future capital purchases or home improvements. I’ve seen some creative thinking (or wishing) that go into these assumptions. Typically the assumptions that turn out to be erroneous are spending and earnings after the passing. Don’t short cut your analysis regarding cost of living and do not make heroic assumptions about your ability to earn more after the loss of a spouse.
Make sure that you buy the right type of coverage. There are two basic types; term life insurance and permanent life insurance. Term life insurance is as the name implies. It is in force for as long a period (the term) as you’ve paid premiums. Most people pay annually or have a monthly debit right out of their checking account or paycheck to keep this coverage inforce. Term life insurance is most appropriate in situations where the need is deemed to be temporary.
Permanent life insurance, on the other hand, is designed to be permanent and last for your entire lifetime. Of course, these policies only last for your entire lifetime if you’ve paid enough money into it and the premiums for permanent life insurance are significantly higher than they are for term life insurance. But if you are ensuring against something permanent such as future death taxes or funding a need that lasts until your very old age, then permanent may be worth considering. Permanent life insurance will typically have a buildup of a cash surrender value that you can take away at any future point by surrendering the policy, withdrawing the cash or borrowing against it.
Don’t let yourself be confused by a life agent. Get independent advice if the seller is confusing you. Don’t be talked into a permanent policy by a cheesy sales pitch that talks about your insurance as a forced savings account. Have the discipline to establish a separate savings account.
The last consideration is your choice of ownership and beneficiary designations. The two real forces behind these decisions are death taxes and protection of the cash post death. Consider using a trust to own your policy and be the beneficiary to offer both protection and potential tax savings.
John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.