Not Always a Nail
Not Always a Nail
Proper Uses of Insurance in Financial Planning
To paraphrase a famous saying, “When you have a hammer, every problem looks like a nail.” Unfortunately, this isn’t just true in carpentry, but sometimes in the financial world as well. Everybody gets up in the morning and goes to work so they can do some good in the world while generating revenue to put food on the table and provide a nice life for themselves and their family. However, the unfortunate truth is that sometimes well-intentioned people who may only have a hammer in their product offering arsenal can view the problems experienced by their clients as nails, even when they may not be.
Insurance is an area where this tends to happen a lot. Insurance is an important piece of a holistic financial plan. However, it is not a substitute for a financial plan. A whole life policy can potentially provide an instant estate, grow a cash value, and provide cash flow later in life. Since it can offer a degree of downside protection not offered by many other products, risk averse clients can be inclined towards it as a sole source of solutions for their financial needs. For financial service providers who may only offer insurance products, this appears to be a great match of problem with solution.
However, reliance solely upon insurance products to plan for future financial requirements can have unintended consequences and potentially leave a client exposed to unintended risks. At Team Duncan Financial, we provide customized financial plans and strive to offer a well-rounded, diverse mix of solutions that evaluates risk from every angle. While insurance is good, too much of this good thing without enough other good things to compliment it can potentially leave you exposed. We’d like to help you make sure that’s not the case.
There are times when insurance shouldn’t be your only answer. Although, situations do exist when the problem is indeed a nail, and insurance is the hammer. Insurance is one of the only products that provides a death benefit, but first should make sure that you actually need a death benefit. Common reasons for needing a death benefit include paying off debts of the deceased, covering final expenses, providing money to cover living expenses for the surviving spouse and children, or providing liquidity while the estate is settled. Of course, this is not a “one size fits all” proposition.
A person with a sizable estate which can pay for the ongoing living expenses of the deceased’s loved ones may only need a death benefit to provide temporary liquidity while the estate is settled. The size of this policy may be much smaller than a policy where the death benefit is meant to provide money for ongoing living expenses for surviving loved ones. This situation is often referred to as an “instant estate.” People who may not have substantial wealth or assets may need a large sum of money to be generated and passed on at their death. It should also be noted that this death benefit generally cannot be contested and is a tax-free payment. It is also often protected from creditors or collection via lawsuit.
Some life insurance products can also offer income while the insured is still alive. Indexed Universal Life policies may offer accelerated death benefits to help pay for medical expenses or provide income streams during periods of missed work for people who are diagnosed with a qualifying serious or terminal illness. A whole life policy can also be sold to a third party in exchange for a stream of payments of a lump sum that is greater than the policy’s surrender value. The accumulated cash value within a policy can often times be used to take a loan or a policy withdrawal, both of which can provide money to supplement other income sources. Lastly, businesses will often need life insurance to facilitate the transfer of ownership of an owner’s shares if they pass away.
Life insurance can solve a multitude of problems. However, it is not a one size fits all solution and should be used in conjunction with a well-crafted, holistic financial plan. Team Duncan Financial would love to help you analyze your insurance needs and existing coverage, then help you reduce any unintended risk due to gaps in your strategy. We put giving appropriate, objective, useful advice above all other priorities, and look forward to putting that philosophy into action for you. We have not only hammers, but all types of tools in our workbench, and pride ourselves on accurately and holistically solving problems, not just pounding in nails.
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