Life Insurance has Two Purposes: To Either Create or Protect an Estate
Life insurance has two purposes: to either create or protect an estate.
Creating an Estate. This is what most people think of as the traditional use of insurance. If a family’s primary wage earner dies before the family has accumulated enough assets to survive, life insurance provides enough money to replace the income of the primary bread-winner.
Protecting an Estate. Estate taxes are somewhat in flux, but are certainly high, and we don’t think they’re going away. Capital gains taxes must be paid. Then there’s something called estate equalization.
Someone with a $10 million estate at their death will have to have to pay several million dollars to the government. Rather than liquidate a family business or sell some possibly illiquid assets, like real estate, it’s usually much more efficient to purchase insurance– and the numbers bear out that it’s actually a good investment (even though it’s technically not one) and the returns are very worthwhile.
Paying estate taxes through the use of a number of specialty life insurance policies is much easier than having to worry about coming up with the cash to pay those taxes within nine months of the death of the person, which is when the estate tax is due.
LIFE INSURANCE YESTERDAY
For many, many years, life insurance came in just two flavors: term insurance and whole life, which we refer to as permanent insurance.
Term insurance is what people bought if they wanted coverage for a term of years; 10 years, 15 years, 20, and so on.
Whole life what you bought to have for the whole of your life.
The problem was up until four or five years ago, whole life was an interest-sensitive investment product. So, while the policyholder thought they knew what the premium was, if interest rates went down, the length of time it took to pay off the premium had to be extended. What you thought you’d pay in 10 or 12 years, could wind up instead being 15 or 20 years.
And term insurance had its own problem: after a while, it ran out.
LIFE INSURANCE TODAY
Today there are new products on the market that are a hybrid between term and permanent life insurance. We call this lifetime term insurance: a policy that stays in force for your entire life. It’s a guaranteed product with a fixed premium. And, like term insurance, it does not have a cash value, which keeps the premium nice and low.
Some hybrid policies do have a cash value, what we refer to as an exit strategy, so if times or circumstances change (i.e. you used to need a lot of insurance, but don’t need as much anymore) there are ways you can bail out and get some or all of your money back.
So, now you don’t have to make a choice between term and permanent life insurance. Lifetime term insurance gives you the best of both:
- You pay a fixed premium amount.
- A flexible exit strategy
- Lifetime coverage
Now for the bad news: we think these types of policies won’t be available for very long. In fact, within the next18 to 24 months we believe these products will start to go away. We’re seeing insurance companies already raise premiums or cut back on coverage. Therefore, we believe there is a great window now to get this coverage while you can. Anyone looking for the security of lifetime coverage should consider this.