Life Insurance: Behind the Veil

in*sur*ance in-ˈshu̇r-ən(t)s – coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril

As a fee-only advisor, Bell Wealth Management does not sell commission-based life insurance. Instead, we help people decide how much coverage is appropriate and then assist them in finding low cost insurance from a financially sound provider. Our approach to evaluating life insurance is different than many (perhaps most) insurance agents. Here’s a conversation to help explain:

Insurance agent: A young and healthy person should think about maximizing the amount of life insurance coverage because it is such a great value.

BWM: It is certainly less expensive for a young, healthy individual to buy life insurance, but why should I purchase more than is necessary to take care of my family? In other words, why should I insure above and beyond the definition of insurance?

Insurance agent: Think about your children. Wouldn’t you like to leave a legacy for future generations?

BWM: Yes, I do intend to leave a legacy for my children and grandchildren, but I want that legacy to be the result of discipline and work, not death. If one is young and still working toward financial independence, then life insurance is prudent and a useful tool to fill in the gap left by a departed provider (a “provider” refers to wage-earners as well as those who choose to stay home and care for children). Buying a large life insurance policy in order to provide a high standard living for your children is not an “insurable need”.

Insurance agent: The decision to buy term life or permanent life depends on whether you prefer to rent or own.

BWM: Life insurance is an asset, but it is unfair to compare term insurance to renting a house. For starters, the annual cost of term is often one-tenth the cost of permanent insurance. If the housing market were priced the same way, everyone would rent. My decision to purchase life insurance is based on the definition of insurance (i.e., guaranteeing against a loss by a specified contingency or peril). If that is my philosophy, then term life is almost always the best solution.

Is there ever a need for permanent insurance? Absolutely. In situations where there is a closely-held family business, permanent insurance can be used to provide liquidity and flexibility. Permanent insurance can also be used to reduce or eliminate a potential estate tax liability. In 2012, the estate tax exemption is $5M per spouse. Therefore, married couples with assets of $10 million or more may want to consider using life insurance as an estate planning tool.