When I started my professional life in financial services, the world was a very different place. My first license gave me permission to talk about and get paid for selling life insurance policies.
Here I am today, in my later years, almost fully retired, and only yesterday I received a call from an old friend, asking me to bring my life insurance skills to bear on a financial problem he faced.
The primary reason for life insurance is to indemnify someone for the economic loss that happens when someone dies. We can argue all day about the emotional loss when someone dies but that cannot be overcome with money.
When we are young, have a new family, life insurance is very important. Consider the economic loss to the family if the primary breadwinner should die suddenly. It’s devastating. Many years ago, I spoke with a young employee of a firm I was working with. He asked me if he could purchase a $100,000 term life policy. I said “Sure” and told him it would cost about $12 per month. He asked me if I’d come back next week since he wouldn’t have $12 until after the next payday.
The next week I called and spoke with the business owner. He told me sadly that the young man had been riding a horse the previous weekend in the woods. At some point the horse went left around a tree but the rider, his employee and my potential client, went right, hit the tree, broke his neck and died.
Without a simple $12 to put the policy in force, he had deprived a young wife and child of $100,000. This was 40 years ago and that was a fortune in those days.
Later in life, we simply need some liquidity to help our family in the event of our premature death. Life insurance can be a fantastic solution. For cents on the dollar, money shows up, tax free, just when it’s needed. At that point it doesn’t matter what it cost, just that it shows up to help solve a problem.
Sometimes, it happens that people get divorced and life insurance is a component of the settlement. Remember it exists to indemnify someone for an economic loss if there is an unexpected death. Sometimes it’s used in a business context, where the business is owned by more than one person. The survivors will suffer economic loss if someone dies unexpectedly. Sometimes the bank where you borrowed money wants an insurance policy on your life to make sure they get their money back if you die unexpectedly.
Like many concepts in the modern world, life insurance is not immune to the advances of technology. Life insurance policies are issued today for people who thirty years ago would have never been considered. We are finding ways to reduce premiums or increase coverage for the same premiums that would have never been realistic even twenty years ago.
It can be used to accumulate retirement funds. Money is after-tax going in, but it accumulates tax-free and can be withdrawn tax-free under certain circumstances. If the insured person dies, the payout is free from income taxes. And don’t forget there are contracts out there that allow you to use future death benefits to pay for Long-Term-Care.
If you’ve not reviewed your life insurance coverage lately, you owe it to yourself to have a checkup. The internet offers all kinds of options, some of which may not be in your best interest. If you can, find a qualified and credentialed professional to help you.
The world may be very different today, but the ability to transfer financial risk to a third party is what insurance is all about.
Tony Kendzior \ July 3, 2019