Every day, we are bombarded with advice on how to adequately save and accumulate investments for our retirement future. Hopefully, many of you have taken notice and you are now on your way to financial security.
Many things in life, unfortunately, are out of our control. How can we protect our hard work against these events? Insurance is the answer. Insurance lets us transfer the financial risks associated with death, disability or health to an insurance company, giving your financial plan a degree of certainty.
I would like to focus on life insurance because I see a lot of confusion about the appropriate use of term versus permanent plans. The rule of thumb I like to use is this: Term insurance is used to create an estate and permanent insurance is used to protect an estate. The majority of families, and certainly the vast majority of young families, likely fall in the "create" an estate group. This group hasn't completed the funding of their financial goals and they are currently depending on earnings from working to meet living expenses.
I will use my own family as an example of where, I believe, term insurance is appropriate. I am in my forties, married with three children ages 9, 12 and 16. Over the years, we have made investments and we are on track to reach the goals we have laid out for our future.
However, we are not there yet. It will take 20 more years of earnings and investing to completely fund three sets of braces, college educations, weddings - not to mention retirement. If something were to happen to me too, I would want to make sure my family would be able to accomplish all of the plans we had laid out.
As you can see, the bulk of our insurance need lies within a 20-year time horizon. After the children are grown and our retirement funding needs have been met, the need for insurance is greatly diminished. This is why I personally elected to purchase a 20-year term policy that ensures these needs are met over the time period necessary.
By selecting a term policy, my premiums are much lower than permanent coverage because I am only buying insurance over the period I need it the most. The money I save on these premiums can be used to fund additional investments for the future.
Permanent insurance has its place and can be a powerful planning tool when used properly. If you pay the premiums on a permanent policy, the insurance company will pay the death benefit to your beneficiaries without a term limit or expiration. This makes permanent insurance a good choice for funding needs that you won't outgrow.
Maybe you have a valuable business and the insurance will create funding for an employee to purchase it at your death. This will ensure that your family will get the value of your business and not be burdened with its operation or sale upon your death. This is a permanent need that will persist until your death. The certainty of permanent coverage may make since for this purpose.
Insurance options can seem confusing at times. Before you sign up for coverage, think clearly about what you are trying to protect against so you don't end up paying for coverage that is not needed. Insurance is a foundational item in your financial plan. Without it, we can never be certain that our goals will ultimately be fulfilled.
Disclaimer: Securities and advisory services offered through National Planning Corp. member FINRA/SIPC, a Registered Investment Adviser. Fourth Avenue Financial and NPC are separate and unrelated companies.
John Burdette is a financial adviser at Fourth Avenue Financial in South Charleston.