By Ramzan Magomedov
Let's talk about life and death.
Life is easy to talk about. It's the death part we struggle with. Let’s start with life then. There's an idea we all have how our life should unfold. Your ideal is probably different than mine. Still it’s likely to have a few major themes common to most life journeys. We grow up going to school. We enjoy our childhood, have wonderful experiences. We have a few struggles too. Truth be told, my childhood wasn't typical. I lived on a remote farm in Russia, went to a boarding school and grazed sheep and cattle most of my childhood. Yours might not have been typical either, for good or bad. Somehow we get through our teen years and graduate.
Some of us go on to college. Some just learn a trade or a skill. Here comes the main course of our life: work, work, work and then some vacation, take care of family. Repeat. We get married along the way and have children-the very best part of human experience as far as I am concerned. I know lots of grandparents that claim vehemently that it’s the grandchildren that the ultimate gift of life. They may be right; I just don't know that part yet.
Once we hit the workforce it's time for us to climb that corporate ladder, build that business, perfect our craft and master our specialty or just get really good at whatever we choose to do for living. Statistically, we are likely to change our careers a few times before it's all said and done. Hope you choose well. It’s also time to raise our children and get them ready for their own independent journey in life. That journey often involves graduating from college. That cost a lot of money. The current average annual cost of college is anywhere from 9K for in state public school to over 30k for a private college. The costs of higher education have been rising faster than the rate of inflation. Take that annual amount and multiply it by the number of children you have. It really adds up. That's OK though because you and your spouse are there to help make it all happen.
So your kids are eventually out of the house. You've done well at work. You also saved religiously and invested wisely. You have that sizable nest egg in place for a comfortable retirement. Ideally.
Here come the grandchildren-I hear they are alright. You are now retired and waking up when you are done sleeping, not because your work schedule demands it. You go on a major vacation once or twice a year (you've got to love those all inclusive cruises). When you get to the end of your life, you have everything in place for the end of life care for you and your spouse. Again, ideally.
Those are obviously very broad strokes. There's typically a thousand variations, detours and sidesteps. Life is not perfect. That's life.
Let's talk about death.
Do you agree that everyone you know will eventually pass away? Imagine now what would happen if in the middle of it all you are suddenly not there. The world suddenly becomes a very different place. Not for you. You are not aware of anything anymore. It’s for someone else or for lots of people that love you and may be dependent on your income and love today.
For most households, it takes two incomes to provide for a comfortable life. I am talking about living in a house that you want to live in, having the quality of life you would enjoy and saving for future needs, to raise and educate your children. You take one person out of the equation and it falls apart.
If you passed away today, would your spouse have enough resources to live comfortably? Would your children or grandchildren get that help with their college expenses as you always told them they would? Would your favorite charity or cause be helped? Would your business survive?
Everything in life has consequences. It’s the eternal principal of cause and effect.
Question you must ask yourself is: if I died tomorrow what would be put in motion to produce the consequences you want? Do you want your family house to be paid off so that your family will always have a place to call home? Do you want your children or grandchildren to be educated? Do you want your spouse not have to struggle exactly when his or her working years are numbered?
What’s the solution? For most people, who aren’t born into a limitless wealth, its life insurance that does the trick. Even if you only made one singular payment on that policy, it can pay the entire benefit in the contract if something happens to you. Its insurance we hope to never collect but we know that all of us will eventually leave this earth. After all the old saw says there are two certainties in life: death and taxes. Given enough time, there are no exceptions.
Ok, you say, I get it. I really need to have life insurance. What's the best time to buy life insurance and what kind should I get?
The answer to the first part of the question is as soon as possible. It's for three primary reasons: 1. the younger you are when you buy it, the less it costs on a monthly or annual basis. 2. There is a risk that if you wait to buy it, you may become uninsurable because of health conditions and you may never be able to qualify to acquire life insurance. 3. And most obvious reason: an illness or accident could cause you do die very prematurely and leave your loved once in a lurch we are trying to protect them from in the first place.
The answer to the second part of that question is more complicated and requires an in depth analysis of your particular needs and circumstances. Then we would examine the offerings available in the market place right now to match them. The good news is that there's a great variety of possible options like term or permanent, indexed or variable, with critical illness or long term care riders etc. Even if you had health issues in the past or you think you are too old and can't get insurance, perish the thought. You can, most likely.
The use of life insurance goes far beyond just providing funds for loved ones if you die. Without going into too much depth, here are a few examples.
Life insurance takes on a role of saving a business in case one of the owners passes away unexpectedly. For most business owners, their business is the main asset that family possesses. Imagine the havoc an unexpected death of a business owner can play on the business. To avoid that, the business owner or owners can take out life insurance which can cover the cost of cross purchasing the diseased partner’s share or a key employee can purchase it and continue to run the business. Without that extra measure, the value of the business can be hard to realize for the heirs or it can collapse all together under stressful circumstances especially if legal bickering breaks out. So business succession planning is extremely important and life insurance can play a key role.
Businesses can use life insurance to enhance employee benefits and the amount that can be socked away into a tax differed instruments through defined benefit plans.
Some people would love to leave a major gift to a university or a charity. There's a way to accomplish that through a Charitable Remainder Trust and use the income from it to buy a life insurance policy so that your heirs would get a large inheritance as well.
Life insurance is invaluable in addressing Estate planning issues. If the estate is large enough, the Federal Government and most states want a large chunk of it in taxes. Life insurance can help pay those taxes when they come due shortly after someone dies.
Some permanent life insurance is great for creating a sizable cash reserve that can be accessed through policy loans tax free. That cash can even generate interest income indexed to capital markets in a variety of ways. Given the major uncertainty of where taxes will be in the future, life insurance cash value can be a wonderful source of tax free funds.
Some policies allow you to stop paying for a while and then catch up later when you are able, providing further flexibility to owning life insurance and achieving your financial goals.
If you already own a permanent life insurance policy, be sure to get it reviewed periodically. Your needs and circumstances change. Available plans change. There are new products and new features being added all the time that might not have been available before. You may get a better health rating than you did originally and therefore get more insurance for less money now than you did originally. There’s something called 1035 exchange that allows you to move insurance policies and cash values from one insurance product and company to another.
So the list goes on and on. There are lots of things you can do with life insurance. There's a 100% chance that our life will end. What we don't know is when. Let's plan for it. If you do this right, it just might be the greatest gift you've ever given just when it was needed the most.