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A joke gets passed around in certain financial services circles: at a party, the investment advisor always has a group of people gathered around, hanging on their every word, while the life insurance agent is standing completely alone. It’s sometimes called “the life insurance shuffle”: the sidestepping move people make to avoid having to listen to a life insurance sales pitch.
While most of us don’t enjoy being “sold,” life insurance still serves an important role in financial planning. At its core, it’s a protection tool, designed to provide financial support when the death of a spouse, parent, business owner, or other key person would create a financial hardship. As we’ve written previously, life insurance should be a part of almost every family’s financial plan.
Life Insurance as a Planning Tool
As financial lives become more complex, life insurance can sometimes address planning needs beyond basic income replacement. The key is starting with the need rather than the product. For some families and business owners, that may include business continuity, estate liquidity, inheritance planning, or providing for beneficiaries when other assets are difficult to divide or access.
Permanent life insurance may be appropriate in some of these situations because the coverage is designed to remain in place for the insured’s lifetime, assuming required premiums are paid and the policy remains in force. But that doesn’t make permanent insurance an investment or a default solution for building wealth. The costs, policy structure, and long-term need for coverage all need to be carefully considered.
Protecting a Business and Its Owners
Life insurance can also have valuable applications for business owners. If a business has multiple owners, for example, life insurance can be used to help fund a buy-sell agreement, providing liquidity that may allow the surviving owner or the business to purchase a deceased owner’s interest. This can help provide continuity for the business while giving the deceased owner’s family value for their ownership interest.
Life insurance can also help protect against the loss of a key employee whose death would significantly affect cash flow or operations. A key person policy, owned by the company and insuring that individual’s life, can provide liquidity to help the business manage the transition, including the costs of hiring or training a replacement.
Life Insurance in Estate and Legacy Planning
Life insurance can also provide value in estate planning. Because death benefits generally pass directly to the named beneficiary rather than through probate, life insurance can provide beneficiaries with liquidity relatively quickly after the insured’s death. Depending on how the policy and estate plan are structured, those funds may help address estate taxes or other obligations, or provide resources for beneficiaries inheriting less-liquid assets such as real estate or private business interests.
Some persons may elect to use life insurance proceeds as a way to equalize the inheritance for various heirs and beneficiaries. For example, an insurance policy held in an irrevocable life insurance trust (ILIT) can pay death benefits into the trust upon the insured’s passing, and the terms of the trust can then allow those proceeds to be paid out to the trust’s beneficiaries as specified by the trust. Such an arrangement could be used by a person in a second marriage to provide for the needs of a surviving spouse while segregating the estate’s other assets for the benefit of their biological children from a previous marriage. When properly structured, an ILIT may also help keep life insurance proceeds outside the insured’s taxable estate.
Life Insurance Beneficiary Designations and Estate Planning
It’s important to remember that the same provision of life insurance that allows it to bypass probate also requires ongoing review to make sure the policy aligns with estate planning intentions. For example, suppose someone buys a policy and names their spouse as the beneficiary. Subsequently, they divorce. The owner would probably want to change the beneficiary designation on the policy from the ex-spouse to their children or a second spouse, if applicable. Unless they make the change, the death benefit of the policy would be paid to the originally named beneficiary (the ex-spouse), regardless of any other provisions of the owner’s wills, trusts, or other documents. Because beneficiary designations allow insurance proceeds to bypass probate, they should be checked periodically to ensure that they are consistent with how the owner wants the estate distributed.
At Aspen Wealth Management, we view life insurance first and foremost as a protection tool. In the right circumstances, it can also play an important role in business, estate, and legacy planning. If you’re wondering whether life insurance has a place in your broader financial plan, our team can help you evaluate the need, the available options, and how they fit alongside the rest of your strategy.