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The "quiet problem" of life insurance omission

This article is part of the 'working millionaire' series

by Tony Novak, CPA, MBA, MT
revised 10/11/20112

A working millionaire is a person whose net worth appears likely to exceed $1 million and may even exceed $10 million. Logically, this position should reduce financial stress, yet many everyday financial problems prevent us from fully enjoying their success. This series of articles is specifically intended to address some of the problems faced by working millionaires.

After a few job changes and maybe a divorce by their mid 40s, many otherwise financially successful people find that their only life insurance comes through employer-provided group insurance plan. There is no reason to be concerned; the coverage is adequate to protect the family, the cost is low and there is a conversion feature just in case of unforeseen circumstances. So what' s the problem?

Fast forward about 15 years. By this time today's successful baby boomers wish they had put more money into life insurance. Paid-up permanent life insurance enables flexibility in their retirement spending over an otherwise turbulent and risky economic period of history. It is not that they have a wish to endow anyone in their memory, but rather that having the assurance of would allow them more financial planning options in retirement. By this pre-retirement age the cost of new life insurance may be prohibitive and more likely than not, health has deteriorated to the point where conversion of employer' s coverage is no longer an option.

Group life insurance offers no real solution. Insurance carriers report that more than 99.9% of all group life insurance policies issues are cancelled before the insured person dies. So while the coveravge may serve as a benefit during employment, it does not provide any significant value from an individual financial planning persepctive.

By the time we enter our peak earning years, many of us still have little of the financial asset class - permanent life insurance - that we will eventually come to value above the others. This financial planning omission crept up on us somewhere in mid-life, just like cholesterol; unnoticed - but serious in its consequences.

The solution is actually very simple: own a small amount of permanent life insurance- usually an amount equal to about a year' s base earnings - usually whole life insurance, separate from the employee benefit package. This is the "old fashioned" type of life insurance that sets premiums too high and gives money, in the form of dividends, back to policyholders those who stay for the long term. You want to be among this "long term" crowd.

It is important to choose a good solid insurance company. In fact there is absolutely no reason not to use one of the few elite companies that have proven to be the best in this field. The cost is not an obstacle - usually about 2% of earnings - but it pays to start early. The younger you are when the plan is started, the lower the annual cost. The key is to get a guaranteed cost policy with a paid-p cash value that is actually an asset. By the time you reach retirement age, the policy begins to look like a savings vehicle with an increasing cash value and even higher protection for a spouse of children.

Having this insurance policy now gives flexibility in spending retirement assets. We do not need to worry that our badly timed death in a bad market year could put a surviving spouse in financial trouble. (For those who have not actually participated in "real life" retirement income planning, the risk of overspending assets created by year to year variability in the markets is often the most worrisome issue in the process). 

There are some tax and legal advantages of having some permanent life insurance. These issues are not discussed in this article but it is worth noting that these factors become important to some people in the event of legal difficulties or divorce.

Finally, consider that we are not endorsing large amounts of permanent life insurance, but rather a relatively modest amount. If an agent proposes an amount running into hundreds of thousands of dollars, then you owe it to yourself to get a second opinion who does not make a living selling insurance. Large policies are not bad idea for everyone, but certainly warrant additional consideration in the form of additional options.

Status: available for reprint

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