As Garry noted in last week’s blog post, the third quarter of the year is when the Master’s team, through our Total Wealth Management planning process, performs a review of our clients’ risk management strategies. In part one of our series, we are exploring the age-old question: “Do I need life insurance?”
In its simplest form, the main intent of life insurance is to provide a tax-free death benefit to beneficiaries during one of the most traumatic times in their life; the loss of a loved one. While life insurance does not take the pain of loss and grief away, it can help to ease the financial burdens and life transitions that may need to take place.
As a result, while each person’s financial situation is unique and there are many use cases for life insurance, four of the most common are as follows:
- Debt Payoff – Whether it be mortgage debt, consumer debt, or student loan debt, life insurance can be used to pay off this debt in the event of someone’s death. The ability to pay off these larger debts can provide beneficiaries with some financial breathing room and much-needed peace of mind.
- Income Replacement – Another use for life insurance is to provide a source of funds to help supplement the income that will be lost. This income replacement can be important to not only help the survivors pay their ongoing bills, but it can also allow them a chance to take time off work, pay for extras like childcare, and help keep future savings goals on track for things such as retirement or education funding.
- Final Expenses – Life insurance can also provide funds to cover someone’s funeral costs and other final expenses. As many who have lost loved ones know, these types of things can be costly, so having some extra money to use to cover these types of expenses can be helpful.
- Business Planning – Being a business owner can be very rewarding, however, there are risks involved as well. The untimely passing of a business owner or key employee can have far-reaching implications, not only for their families, but for fellow owners, employees, and customers. It is vital to have well thought-out contingency plans in place. Life insurance can often play an important role in providing much-needed liquidity to the surviving stakeholders, whether it be to help ensure the business operations can continue, or to fund a buy/sell agreement.
The life insurance industry touts many other uses for life insurance, such as generating income, ‘being your own bank’, or offering tax-advantaged growth. While these policies can be useful in select circumstances, our experience is that life insurance is generally best in its simplest form of providing a tax-free death benefit to heirs.
Do you fit one of the scenarios above and are not sure if you are adequately covered? Or do you currently own policies that may not fit your situation anymore? Let us know and we will be happy to help!