It’s Not Just a Matter of If, But When
Nov 03 2008
I’ve been told that one of the “funniest” things you can say to an estate planning attorney is, “If I die, I want to…”. Think about that statement for a minute. I’ve also read over the years, arguments about the better choice for life insurance – permanent/whole life or term. I’m not going to try to solve that argument for you today, but based off an article I read in the Journal of Financial Planning, I’m going to recommend a different lens with which to look through to determine you life insurance needs.
Let me start by saying that I believe you buy life insurance to insure against the financial consequences of death. You don’t buy it as an investment vehicle. There are those out there that don’t agree with that statement. I’m willing to listen to the argument, but I believe that if you buy insurance as an investment you’re trying to do too many things with one vehicle.
So that brings me to the lens….the If/When question. I think that if you start with the If or When question, you’ll know when to buy term insurance and when to buy permanent/whole life.
For instance if you say, “If I die before my children start college, I’ll need to pay for it with insurance”, then term life might be appropriate. If you say, “If I die before my mortgage is paid off…” you might need term insurance (but most likely not a decreasing term, mortgage policy). I think you get the point.
If you say, “When I die, there will be probate expenses”, permanent insurance might be appropriate. “When I die, my spouse will need money until the business is sold”…you guessed it, permanent/whole life. If there will be a requirement to care for a special needs child “When you die”, then again permanent insurance might be the right choice.
There are, of course, exceptions to this rule. One that comes to mind is “If I die before my spouse is eligible for Social Security surviving spouse benefits.” In this case, if you are very young, permanent insurance might be cheaper in the long run…you’ll have to check the specific costs of a 20+ year term policy versus permanent insurance.
I don’t claim the model is perfect…but it’s not a bad place to start.
