Even during normal times, people don’t like to talk much about life insurance. In fact, with the stress of home schooling, health concerns and an upcoming election, discussing life insurance is probably the last item on anyone’s “To Do” list.
Many households are in survival mode just trying to get by day to day. That often makes it difficult to think long term, but the reality is that insurance is an essential foundation of planning.
The COVID-19 crisis illustrated why it’s so important to have an adequate cash emergency fund. But with a bit of imagination, life insurance can be very useful in the financial planning process.
It’s common sense that having a strong foundation is a vital step in the development of a long-term financial plan. It’s akin to the real-world building process. For example, you wouldn’t construct a large commercial building without installing the sprinkler system or taking other fire protection measures. When you take shortcuts, you’re also taking a risk.
My concern is that far too many households are taking shortcuts building their financial futures. Research by LIMRA, the worldwide financial services trade association, completed just prior to the pandemic, revealed that the purchase of life insurance has declined by 25 percent over the past 10 years.
Nearly 70 percent of the respondents indicated they had other financial priorities and 65 percent said life insurance was too expensive. Some 45 percent claimed they just hadn’t gotten around to it yet and just over 40 percent had no desire to even think about anything related to death.
I’m pretty sure that discussing your own demise and planning life insurance for the occasion is an unpleasant topic. But it is a topic that should be discussed sooner rather than later. Most of us have either been touched by tragedy or know someone who has. Family members still need food in their bellies, a roof over their heads, and, for younger members, to get an education. Life insurance helps.
There are also business applications. For example, recent legislation changed the rules on inherited IRAs for non-spousal beneficiaries. Now, income tax on these inherited IRAs must be paid within 10 years of the IRA owner’s death. Previously there was no time limit.
Many estate-planning attorneys are now suggesting using life insurance to cover the cost of the projected taxes, so your heirs can inherit the entire amount.
One presidential candidate is proposing changes to the stepped-up in basis tax rules. This could easily create unexpected taxes for everyday people who inherit a house or investment from parents or grandparents.
Many articles are already being written suggesting life insurance as a solution to cover potential future taxes.
For years, businesses have successfully utilized life insurance to help compensate and retain key employees, and also to facilitate changes of ownership in a business.
Life insurance is not a solution for every concern or problem, but it should not be overlooked in planning discussions. For protecting your family from tragedy, for prudent business planning and for sophisticated tax planning, life insurance is worth your consideration.