Estate Planning and Life Insurance

THE Legacy Hierarchy ™
STAGE 2: SECURITY – LIFE INSURANCE

I have come to the conclusion and maybe realization that life insurance is very misunderstood. It is misunderstood because the perception and approach by most people is that it is a cost that one would rather not have for a risk that one doesn’t want (dying). I agree with the second part of that statement but spending money for insurance can make a massive difference in people’s lives.

I was having a conversation with one of the professionals in our office who invests in real estate. We were talking about the phrases “source of funds” and “use of funds” as those terms are used in finance terminology. After a long discussion and some thought I came around to his way of thinking that when a person owes you money that is a use of your funds. It’s a use of your funds because that person is using your money to do things they want to. If you had the money you would be able to do things you want. I had viewed this idea as a source of funds because I go about my daily life and I have a source of funds just waiting to be collected.

I bring up these concepts because when we look at life insurance most people don’t want to pay the yearly cost of insurance and besides they will be dead. Here is the key. All the money that has to be spent to cover costs when there is no insurance is a use of your funds. You have to pay it. With insurance you have a source of funds, the piggy bank, to rely on to get you through tough times.

Let’s say the unthinkable happens and you do die before your time. Now what happens? Your family is left with the consequences. Well what does that mean? Let’s look at some of the negative consequences of not having proper insurance.

1. How much money were you making? How much of that money was being used to pay for the daily necessities of life, your home mortgage, your car payment, food, utilities, clothes, gas for the car. Now that money is gone. How are those bills supposed to get paid. Even if your spouse is working are they making enough to cover these costs. If not, guess what? You lose your home, you lose your car, you have to move. Where are you going to go? What school changes will have to take place. What will happen to the friends in school that your kids made?

2. If your spouse wasn’t working because you were the sole money earner, how long will it take for your spouse to get a job. In these strenuous economic times that could take a year maybe even longer. What is supposed to happen during that whole time. Even if you were smart and put away money for hard times, how much money did you save and is it enough to cover 6 months, one year or longer?

3. At a first death there will be no adverse tax consequences, but at a second death for those families who have a higher net worth, the government wants your money and you get to pay it within 9 months. If you own real estate and that real estate can’t be sold, how are you going to come up with the estate taxes? What if the estate taxes are simply more than you have in cash? Life insurance can cover this risk. Life insurance leverages dollars. That means that for a total premium outlay over time the return you receive oftentimes will be more than you could ever put away in savings over the years. For example, let’s say you have a couple thousand dollar cost for a 1 million dollar policy, that $2,000 per year can’t possibly grow to 1 million to cover an unexpected death.

4. Life insurance offers one benefit that pretty much no other investment offers. Tax free money. When life insurance is received by the family there is no taxation. None. No strings. Here you go. When the money called the cash value of the life insurance increases there is no tax on that amount. When that growth passes to the beneficiaries after a death, there still is no taxation. That is one step better than annuity products sold to the public that offer tax deferral but not tax free investments. The insurance companies are masters at this game. They come up with new strategies and tactics all the time to get around taxation and provide benefits to businesses and families. Some of these strategies allow for business to get tax deductions.

We do not sell insurance or annuities but we have very strong relationships with the professionals that do and we work together as a team to provide the best solution to your needs. If you haven’t had an insurance review to determine what is right for you this is a step I would highly encourage and we are here to serve and guide you. If this is an area you would like to explore please call us.

Next week we will talk about keeping people out of jail. Stay tuned.

CategoryLegacy Hierarchy
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