Dont Suggest Temporary Solutions For Permanent Needs

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For many Americans planning their financial future, recent events have bred an understandable sense of personal and economic insecurity.

As a result, many families are re-examining their need for insurance as part of their overall financial plan.

Now, as in the past, the financial advisor must help clients understand that life insurance, like other elements of a sound financial plan, must reflect both long- and short-term needs. Therefore, your discussion with clients should lead to an assessment of those needs.

This article will look at some of the factors to address, and also at the role permanent insurance can and should play.

When it comes to life insurance planning, owning the right amount of insurance is more important than owning a specific kind of policy.

Therefore, the advice to “buy term and invest the difference” is appropriate for those with short-term needs. And, for some families, term insurance may be the only way to provide sufficient financial protection if a breadwinner dies.

However, when this advice is used as a one-size-fits-all solution to clients insurance planning needs, two important aspects of human nature are ignored: the actual “financial behavior” of clients; and the propensity for clients to alter their financial goals over time.

About the first: The fact is, most people dont invest the difference. A 2000 Harris Interactive poll found less than one-fourth of term policyholders invested any of the premium savings, and only 10% invested all of it.

About the second aspect: Many people feel more comfortable enjoying the cash assets they have accumulated, knowing the death benefit is there for beneficiaries. Yes, their need for life insurance may decrease as wealth grows and children leave home–but it rarely goes away.

Here are some questions to consider, when evaluating this aspect of the clients situation:

  • Will your clients really want to forgo insurance down the road?
  • Once your clients outlive the term policy, will they feel secure without the death benefit theyve had all those years?
  • Is the investment fund sufficient to support their beneficiaries?
  • What impact has inflation had on your clients death benefit need?
  • What estate tax liabilities exist that didnt when they began planning?

As you assess these factors, keep in mind that permanent life insurance has a long-term economic advantage over term insurance, often making it the most cost-effective recommendation. Consider the figures in the chart, for example. They show values for two policies purchased in 1977 by a man who was age 25 at the time. One policy was a $100,000 term life contract, and the other was a $100,000 whole life contract. The values shown are for the man now, at his current age of 50.

Now, I would like to make a case for using traditional whole life in certain planning scenarios.

Traditional whole life generally works best for people with longer term needs who want a solid guarantee that the premiums will never go up, the death benefit will never go down, and the guaranteed cash value will grow year after year.

Whole life provides a financial resource your clients and heirs can access for a variety of opportunities such as supplemental retirement income, education funding, or a financial resource that allows one to pursue a business or other opportunity, even as it provides an immediate tax-free benefit in the event of the insureds death.

Naturally, clients should not enter into any permanent life insurance contract lightly. Surrendering a policy in its early years can be costly, in terms of premiums paid relative to cash value.

Therefore, if there is any doubt about a clients ability to afford a permanent contract, consider supplementing a smaller permanent contract with a convertible term policy or a custom-designed blended contract.

Finally, whether you and your client settle on a term or permanent policy, it is critical to recommend a policy from a company that will provide the best long-term value and service. (In my view, this often means buying from a mutual insurer. Thats because such insurers are committed to paying dividends to policyowners, not stockholders; and because they typically take a longer-term view in running their business, thus providing, in my opinion, better long-term value.)

Too often, life insurance contracts are measured against other investment products for their returns alone. But life insurance offers more than just a cash value component. It should be considered the bedrock and most conservative element of any sound financial planmoney that absolutely must be there, whether your client lives or dies, regardless of the economic cycle or climate.

, CLU, ChFC, of Los Angeles, is a financial representative with the Northwestern Mutual Financial Network, the sales and distribution arm of Northwestern Mutual.


Reproduced from National Underwriter Life & Health/Financial Services Edition, July 15, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.