People buy and use life insurance for many reasons. Unfortunately, too many people make poor life insurance purchase and use decisions because they do not try to understand their options. Instead, they rely on insurance promoters and amateur advisors to tell them what they need to purchase and how they should use it. Their blind faith often leads them to purchase too much insurance, purchase the wrong kind of insurance, or do things with their insurance that trap them in financial problems.
Insurance is a risk management tool. We pay insurance companies to bear financial burdens of undesirable future events, such as illness, theft, fire, death, and disability. Like any other tool, each kind of insurance helps solve a particular kind of risk problem.
The first important life insurance purchase decisions should be to determine what purpose life insurance serves better than any other investment and how much insurance is necessary to achieve that purpose. A life insurance purchase is an investment like any other expenditure for financial service products, so the investment decision should consider the investment alternatives. Insurance is rarely the only investment alternative to serve a particular purpose, so you should only purchase life insurance if it is the best solution for the intended purpose.
Smart life insurance customers buy insurance to ensure that there is enough money available to pay certain expenses that might otherwise be difficult to pay when they or others die. For example, business partners often purchase insurance on each other’s life to provide money to purchase their deceased partners’ shares of business ownership and avoid the need to borrow buyout money from banks. Similarly, young married homebuyers often purchase life insurance so that a surviving spouse can pay off the mortgage loan and reduce expenses that would otherwise be hard to pay without the deceased spouse’s income. The key is to know why you want to buy life insurance and estimate how much insurance you need.
It is sad to see people buy life insurance to produce wealth. When someone buys life insurance simply because they want the death benefit to enrich family members, the insurance customer is placing a casino that the customer will die very soon. Unfortunately for the customer (or fortunately by and other perspective), life insurance companies generally only sell life insurance policies to people that are healthy enough to be insurable, and they have enough life expectancy data to win most of those bets. Thus, much like the saying goes in the casino industry, “the house always wins.”
The second level of life insurance purchase decisions should be to determine which life insurance variety solves the insurance problem best and which insurance company offers the best insurance policy for the money. The old saying, “you get what you pay for,” applies to life insurance as much as it applies to automobiles and tennis shoes. There may be as many quality variations among life insurance companies and life insurance policies as there are automobile models and tennis shoe styles.
An affordable price does not always mean that something is a good value, so smart life insurance customers shop around and compare products and premiums to get the right kind and amount of insurance for the most reasonable premium. Otherwise, a customer may end up with too much life insurance, or insurance that costs too much in comparison to the death benefits.
A reputable estate planning lawyer understands life insurance alternatives and how life insurance fits within an estate plan. Such a lawyer works with many life insurance agents and companies, and has a good understanding of which insurance companies and insurance products best survey client’s particular estate planning needs.
Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and Jeff is a Fellow of the American College of Trust and Estate Counsel, the American Bar Foundation, and the Indiana Bar Foundation. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator and was the 2014-15 President of the Indiana State Bar Association.
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