Consider Your Plan Before Customizing Your InsuranceWilliam Lako William Lako
KENNESAW, Ga. (Dec 7, 2017) — Let’s say you’ve bought a souped-up clothes washer with all the bells and whistles. It’s the latest “smart home” machine to hit the market. It has an app that allows you to monitor the laundry cycle from your phone. It will even email you when it calculates you’re low on detergent. Then one day, the motherboard burns out. The repair technician comes to your home and as he’s working on your machines, he says, “You should just go to the store and get the most basic model you can. It’ll last you 20 years.”
Basic models don’t have all the fancy features you only use once a year, nor do they have the pretty LED lights, but they still get your clothes clean. It’s a basic principle: Buy a product that is designed to do what you need. You bought a washer to have clean clothes — not order detergent from Amazon.
This isn’t just good advice for household appliances, but it’s also good advice when it comes to life insurance products. For a price, you can buy a policy that provides a death benefit, has an investment component, has an option that allows you to use dividends to reduce your premium, and a rider that waives premiums in the event of a disability. While that sounds good and interesting, ask yourself before you buy a souped-up product, “What is my goal?”
Investors buy life insurance for a variety of reasons. Nearly always, the goal is to alleviate the financial hardship an untimely death of a breadwinner can cause. It is the “why” that varies. You may be ensuring a spouse could stay in the family home, securing your child’s education, protecting the future of your business, or caring for aging parents. Once you know what it is you’re trying to accomplish, and when you have gone as far as you can with your financial plan, then you to turn to insurance to protect those goals. Life insurance needs to fit into the bigger picture of your comprehensive financial plan.
In broad terms, life insurance is either term insurance, which lasts for a finite period, or permanent insurance, which lasts as long as the insured is alive. Permanent insurance is often sold as both insurance and a savings plan. It provides a death benefit, but also accumulates a cash value for the insured to tap when needed. Unfortunately, these goals can work against each other. In order to tap the cash value, the death benefit must be sacrificed to some extent. Furthermore, as you get older and your initial goals are accomplished and new goals take place, the insurance component becomes less meaningful. For example, as your children have graduated and are living on their own, and your own retirement is 10 to 15 years away, the need for life insurance decreases. You may not need a large death benefit, but you may want to secure long-term care to help ensure your retirement years go as planned.
That is not to say that policy options and riders don’t have a place. You can still use riders to customize your policy, such as adding an acceleration rider that allows you to tap the death benefit for long-term care costs. Before you are sold an extension of benefits rider to increase your long-term care coverage beyond the death benefit, step back and ask yourself, “What is the goal?” Perhaps a pure long-term care policy may be a better fit. Ideally, you are looking for the lowest cost solution to your problem.
Before buying a souped-up policy that is designed to solve all your problems, make sure that you have addressed your financial plan first, and have turned to an insurance solution second.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta’s longest running, most respected financial talk radio show “Money Talks” airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.