June 30, 2010
“Planning for Life”
I sat down recently to compose this commentary with the idea of explaining First Command’s philosophy on life insurance. It’s a vital cornerstone of our comprehensive approach to financial planning with which I want all of our clients to be familiar and comfortable. But after an hour or so of typing and then deleting phrases like “risk management,” “primary wage earner” and “guaranteed insurability,” it finally dawned on me that life insurance is not something effectively discussed in detached, technical terms.
That’s because most people don’t make the decision to purchase life insurance the same way they make the decision to purchase a new washer and dryer, or even a new car. They purchase washers and dryers and cars to fill their immediate needs; they purchase life insurance to fill the anticipated needs of loved ones that may not arise for years, or even decades. And though they may understand that purchasing life insurance is a smart thing to do, they’re more likely to take action because it’s the right thing to do.
For all of these reasons, it’s less meaningful to discuss life insurance on the basis of features and benefits than to discuss it in the more human terms of needs and solutions. The need, from a planning standpoint, is to provide the surviving members of a family with sufficient assets to pay off debts and create a stream of replacement income. And there’s no better solution for meeting that need than life insurance. By pooling our dollars and sharing the risk of an untimely tragedy with others, we’re able to take advantage of leverage—spending a relatively small, predictable amount of money now to ensure that we’ll not be faced with an unexpected and potentially devastating financial liability in the future.
But I’m slipping again into the language of theory and explanation. And every First Command Financial Advisor who has ever assisted a family with a death claim will tell you that, no matter how well you understand the theory of life insurance, it’s not until that moment—when a loved one is lost and a family is at emotional loose ends—that you truly understand what a crucial role life insurance plays within a financial plan. In the short term, it allows the family to properly grieve for their loss without worrying about a looming financial hardship. And in the long term, it ensures that the surviving members of a family will have the same opportunity to achieve their goals and dreams as they had before the tragedy of unexpected and premature death intervened.
OK, I think you know where we stand on the importance of life insurance within a comprehensive financial plan now. But there are still a couple of questions that come up in almost any discussion about life insurance that I haven’t addressed. So let me take the time to do so now.
What is the right amount of life insurance?
Unfortunately, more so than with any other area of financial planning, people—including some financial advisors—rely on rules of thumb and one-size-fits-all formulas to determine how much life insurance is appropriate. The most common of these shortcuts suggests purchasing coverage equal to five to seven times one’s income. Though I’ll readily concede that this is a far better approach than not purchasing life insurance, it’s hardly the kind of detailed precision that we believe should be applied to such an important planning decision.
Our preferred approach is to conduct a thorough “survivor needs analysis” with every client, asking detailed questions about what debts their survivors would need to pay off and what assets or income they would need in the event of the insured’s death. The objective is to identify all significant needs, assign a dollar value to each and then prepare a life insurance plan that delivers the right amount of dollars at the right times to the surviving family members. If you haven’t been through this exercise recently, I would strongly encourage you to make an appointment with your First Command Financial Advisor. It’s common for people’s insurance needs to change as they move through different stages of life.
What is the right type of life insurance?
Auto and homeowner’s insurance are relatively straightforward products. We pay a regular premium that’s based primarily on the value of our car or home, but also takes into consideration the likelihood of an accident occurring. If an accident does occur, the insurance company reimburses us for most of the associated costs.
In its most basic form, life insurance is similarly straightforward. A term life insurance policy provides a specified monetary benefit to the named beneficiary or beneficiaries if the insured dies within the term, or period of time, defined by the policy.
But there’s an important difference in the events against which we’re insuring ourselves when we purchase these products. It’s possible that we’ll be involved in an automobile accident, or that our house will be struck by a tornado or burned in a fire. But it’s inevitable that we will die. That’s why we believe that the best foundation for most clients’ life insurance plans is Whole Life insurance that is guaranteed to be in place when death occurs.
Does that mean that Whole Life is the only kind of coverage you should own? Probably not. The needs of the insured’s survivors should always dictate the optimal amount and types of coverage. Generally speaking, we believe that permanent—or Whole Life—insurance should be recommended to cover permanent needs, and that temporary—or term—insurance should be recommended for covering temporary needs.
Summing it up
I’ve heard people say that life insurance should really be called “death insurance” since that’s what you’re insuring your survivors against. Some have even suggested to me that calling it life insurance was a marketing decision by an industry concerned about its product being negatively perceived. I suppose that’s possible, but I have a different take on it. I think that calling it “life insurance” makes perfect sense—because its real purpose is to make sure that the surviving members of a family have an opportunity to live the lives they’ve dreamed of living.
J. Scott Spiker
Chief Executive Officer
First Command Financial Services, Inc.
