How Does Life Insurance fit into the Financial Plan?
We often get the question regarding the importance of life insurance and how much is the right amount. Being fee-only advisors and not selling insurance, clients really value our advice on this matter, given there is no conflict of interest.
Maybe you’ve heard the saying “buy term and invest the rest”. But what does this mean? Simply put, it means compare the price of term life insurance vs. permanent. Buy the term life insurance (typically cheaper), calculate the cost difference, and invest the remaining amount.
This philosophy is opposed to buying other life insurance vehicles, like whole life insurance policies, which tend to pay the underlying company and the advisor higher commissions than a term life insurance policy. That extra commission comes at the cost of benefits or higher premiums to the customer.
We think there are two main reasons that someone should consider whole life insurance:
- If term life insurance is not affordable because of age or medical history.
- If the family requires the disciplined structure associated with making the life insurance premiums as a forced savings mechanism, then certainly the money put into the life insurance policy is better spent from an investment perspective.
If neither of those situations are applicable to a client, then we prefer for our clients to have a very disciplined savings strategy and to buy low cost term life insurance.
Lastly, it is worth noting that everyone’s financial picture is different. We tailor our advice for those differentiations. What might make sense for one family doesn’t necessarily make sense for another. To learn more, please contact us to schedule a free consultation.