Life insurance basics

One of the questions I get most often when meeting with tax clients is life insurance. Do I need it? Why? And if so, when? No two client’s financial circumstance are the same, so in short, it depends. I will illustrate a few of the basics.

Insurance Basics

Life insurance is precisely what it sounds like: for a set period, the insurance company will pay out a specified sum in the event of your death. The event of considering if life insurance is for you, is a selfless one. After all, in most cases, the benefits of the policy are only seen only after the insured has passed on. There are life circumstances that warrant not having coverage- but for the vast majority of us, life insurance is cheap, and it's an easy way to ensure we don’t put any unnecessary financial obligation on our loved ones.

Changing life events

One of the fundamental reasons for owning insurance is to protect your family, as well as not inundate the survivors with your financial responsibilities. Term coverage for 10, 20 or 30 years can provide security for your spouse or children during that time. Permanent insurance can provide security so you don’t ever outlive the coverage defined by your policy term.

The most difficult part of life insurance is thinking about the “worst-case scenario.” Think about what would happen if you weren’t here. Can your family afford to stay in your home? Does your spouse have to get back into the workforce- and if so, who’s caring for the kids?

What if both you and your spouse were taken? Have you allotted funds for your children’s caregivers? Or is that financial burden now on them?

The most difficult part of life insurance is thinking about the “worst-case scenario.”

Additionally, if your needs change, additional coverage can be written easily. Below are a few examples of events that should trigger additional coverage, or cause you to review your existing policies:

1. Getting married
2. Having children
3. Buying a home or buying a more expensive home
4. Enrolling your child in an expensive college
5. Maintain current standard of living in case of death of breadwinner

Business Insurance

If you are self-employed or in a business partnership, life insurance coverage can address many unanticipated problems. If your business would be impacted by the loss of you or a significant employee, the company can buy a "key man" policy. This provides funds to either hire someone with similar skills or keep the company afloat until it can be sold. Partnership agreements need to address a similar need. If you or your partner dies prematurely, the surviving partner might not have the funds to buy the other half of the company from his or her heirs. Insurance coverage can provide those funds, giving you control of your business and the heirs fair value for their half.

Deciding to purchase an individual or business policy is a critical decision. Before you do so, meet with several professionals and do your research. Consult with your CPA on the pros and cons of insurance and how it can affect you.

By: David M. Miller, CPA