Let’s say you’ve bought a souped-up clothes washer and dryer with all the bells and whistles. It is one of the latest “smart home” machines to hit the market. It even has an app that will allow you to monitor the laundry cycle from your phone. It will email you when it calculates when you’re low on detergent. And then one day, the motherboard burns out. The repair technician comes to your home and as he’s working on your machines, he says, “You should just go to the store and get the most basic model you can. It’ll last you 20 years.”
Basic models don’t have all the fancy features you only use once or twice a year, nor do they have the pretty LED lights, but they still get your clothes clean. It’s a pretty basic principle: Buy a product that is designed to do what you need. You bought a washer and dryer to have clean clothes—not order detergent from Amazon for you.
This isn’t just good advice for household appliances, but it’s also good advice when it comes to life insurance products. For a price, you can buy a policy that provides a death benefit, has an investment component, has an option that allows you to use dividends to reduce your premium, and a rider that waives premiums in the event of a disability. While that sounds good and interesting, ask yourself before you buy a souped-up product, “What is my goal?”
Investors buy life insurance for a variety of reasons. The main goal is almost always to alleviate the financial hardship an untimely death of a breadwinner can cause. It is the “why” that varies. You may be ensuring a spouse could stay in the family home, securing your child’s education, protecting the future of your business, or caring for aging parents. Once you know what it is you’re trying to accomplish, and when you have gone as far as you can with your financial plan, then you to turn to insurance to protect those goals. Life insurance needs to fit into the bigger picture of your comprehensive financial plan.
In broad terms, life insurance is either term insurance, which lasts for a finite period, or permanent insurance, which lasts as long as the insured is alive. Permanent insurance is often sold as both insurance and a savings plan. It provides a death benefit, but also accumulates a cash value for the insured to tap when needed. Unfortunately, these goals can work against each other. In order to tap the cash value, the death benefit must be sacrificed to some extent. Furthermore, as you get older and your initial goals are accomplished and new goals take place, the insurance component becomes less meaningful. For example, as your children are graduating college and beginning to live on their own, and your own retirement is 10 to 15 years away, the need for life insurance decreases. You may not need as large of a death benefit, but you may want to secure long-term care to help ensure your retirement years go as planned.
That is not to say that options and riders for insurance policies don’t have a place. You can still use riders to customize your policy, such as adding an acceleration rider that allows you to tap the death benefit for long-term care costs. But before you are sold on adding an extension of benefits rider to increase your long-term care coverage beyond the death benefit, step back and ask yourself, “What is the goal?” Perhaps a pure long-term care policy may be a better fit. Ideally, you are looking for the lowest cost solution to your problem.
Before buying a souped-up policy that is designed to solve all your problems, make sure that you have addressed your financial plan first, and have turned to an insurance solution second. If you have questions on how your insurance policies fit into your overall plan, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
