Most people buy a policy and never deal with it again. It’s understandable — no one wants to plan for their own death. You need to review your policies to make sure they are integrated into your overall financial strategy. Recent pricing improvements and lower premium rates may provide the incentive you need to have your policy re-evaluated.
For more than 100 years, actuarial studies have provided insurance companies with the basis for how much they charge for life insurance premiums. The most recent large-scale study, the Commissioner Standard Ordinary Mortality Table, was completed in 2001. Prior to that, the last study was from 1980.
While insurance companies may have their own tables, most firms use these bellwether studies as the framework for determining their rates. The latest statistics reveal people are living longer, and as a result, life insurance companies are able to sharpen their pencils and provide rates that are better than they were even just a few years ago.
For business owners, life insurance often means more than income replacement. Business owners generally also have the need to protect their family’s interest in the business for succession planning and may also have supplemental retirement needs. Life insurance can be used to accomplish these goals; however, it is very rare one policy or product can satisfy both needs. Each concern should be addressed individually.
For example, a business owner may be sold a permanent life insurance policy and promised a large death benefit and tax-favored cash value growth for retirement. Unfortunately, there is no one policy structure that can provide maximum cash value growth and maximum death benefit in an efficient way. Because of the way permanent life insurance policies are structured, cash value growth often suffers in support of a large death benefit. The benefits of “tax-favored growth” inherent in life insurance is not often evaluated in light of the cost of a large death benefit.
A properly structured cash value policy can achieve favorable results; however, an analysis should be done to measure the underlying cost of the policy against the eventual taxes due on an alternative investment.
A better approach would be to address the supplemental retirement plan needs and the succession plan issues separately. When life insurance is used as part of a nonqualified benefit for a business owner or key person executive, the attributes of the insurance policy should be intentional and should serve one purpose. A comprehensive insurance plan may contain multiple products that address the issues unique to a family’s income replacement needs and risks that are inherent to the business.
Likewise, as an executive or professional, you shouldn’t assume that your nonqualified retirement plan or your group life insurance policy will provide for your family’s interests in the event of your premature death. Each financial situation is different; therefore, your life insurance should be properly targeted and integrated into your overall financial strategy.
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. Lako is a certified financial planner.The Marietta Daily Journal will periodically publish columns from KSU business faculty.