It’s a common question: “is life insurance really essential for wealth management?”
That’s likely because, when most people consider what wealth management entails, the aspect that comes to mind is managing investments. However, wealth management is much more than simply trading a portfolio of stocks and bonds.
It involves other vital items, such as estate planning, tax planning, charitable giving, risk management, and cash flow (just to name a few).
In today’s blog, we will discuss the risk management arena of wealth management and, more specifically, the role of life insurance. We’ll discuss its importance and what types of policies to consider. Let’s get started.
Why is Life Insurance Important?
One of the most tragic events someone can go through is the passing of a loved one. Not only is this type of event emotionally gut-wrenching, but it can be financially devastating.
Among the most vital components of a well-designed financial plan is considering the financial ramifications of an unexpected death and evaluating the best strategy to manage these risks.
Some examples of the most common financial risks of an unexpected death include:
Debt Payoff: Is there enough money available to pay off debt to ease cash flow strain?
Income Replacement: Are there enough financial resources to replace any income that may be lost?
Long-Term Goal Funding: Many families are proactively saving for longer-term goals, such as retirement or education funding. If someone passes away unexpectedly, these goals could be at risk.
Other Risks: There are other risks that could exist. These include items such as Buy/Sell Agreement funding for business owners, or estate tax considerations for High and Ultra-High Net Worth individuals and families.
What type of policy should you consider?
While there are many different policy types, most of them can be boiled down into two main categories: term policies and permanent policies.
We strongly recommend taking a needs-based approach to determining what type of life insurance policy to buy. This approach involves first determining what the financial impact would be of a person’s death and considering if these needs are temporary or more permanent.
An example of a temporary financial impact would be paying off a mortgage balance or replacing income while working.
When considering a financial need that is more permanent, an example would be an ultra-high net worth family having an estate-tax issue.
In our experience, term life insurance tends to be the best solution for most needs, due to the relatively low premium cost and the long policy periods on offer.
The Essential Role Life Insurance Plays in Wealth Management
If you have a complex financial situation, own a business, or have a high-income lifestyle, chances are that life insurance is a good option for your wealth management plan.
Life insurance helps to transfer the low-probability, but high-impact, risk of an unexpected death to an insurance company instead of your family or business, for a relatively small premium cost – especially with term life insurance.
As a result, it remains an essential component to a well-thought-out financial plan.
If you, or someone you know, could benefit from a second opinion on your existing financial plan, please reach out!
