The NEST Egg - October 2020

The Purpose of Life Insurance

Gloria:

Life insurance can be a confusing topic, given the many different types available. Many people are even uncertain about its purpose. In this segment, we will discuss:

• The purpose of insurance

• The various types of insurance

• Common questions about coverage

Overall, insurance is designed to protect assets, finances, and loved ones.

But what is it really used for, and who needs it?

Dan:

Do we need life insurance? The answer is “maybe.”
Life insurance is a contract with an insurance company that promises to pay a death benefit when the insured person passes away. The use of that benefit depends on individual financial planning.

Historically, the concept of insurance dates back centuries. Farmers transporting crops by boat faced the risk of total loss if a boat sank.
To reduce this financial risk, they would spread their crops across multiple boats, minimizing potential losses.

Today, insurance serves a similar purpose—protecting financial stability. When evaluating clients, we consider their life stage:

• Young families: Often have high liabilities, young children, and low assets. If a spouse passes away, life insurance provides financial security, covering:

  • Living expenses

  • Debt payments

  • Future education costs for children

• Established individuals: As assets grow and liabilities decrease, the need for life insurance may decline. However, there are additional reasons for maintaining life insurance beyond household protection.

Additional Reasons for Life Insurance

Gloria:

Besides household protection, what other reasons might someone need life insurance?

Dan:

There are several key scenarios:

1. Business Protection:

   • Covers a loan tied to a business.

   • A business owner’s death could leave the company financially vulnerable.

   • A bank may require a policy on the business owner to secure loan repayment.

   2. Estate Planning:

   • Estate taxes can reach up to 50% of asset value.

   • Life insurance can cover estate taxes, preserving more wealth for heirs.

Types of Life Insurance

Gloria:

Can you explain the different types of life insurance?

Dan:

There are two main types, which I like to compare to renting vs. owning:

1. “Renting” – Term Life Insurance

   • Covers a set period (1, 5, 20 years, etc.).

   • Lower cost, as most policies expire before payout.

   • Ideal for young families needing temporary coverage.

2. “Owning” – Permanent Life Insurance

   • Lifelong coverage (often to age 100 or 120).

   • Includes cash value accumulation (like a savings component).

   • Types include Universal Life and Whole Life Insurance.

   • More flexible and can be customized to meet specific needs.

Note: “Renting” and “Owning” are illustrative terms used for explanation—these are not official insurance classifications.

Employer-Provided Life Insurance

Gloria:

Many people have life insurance through their employer. How can they determine if they have sufficient coverage?

Dan:

Employer-sponsored life insurance should not be relied upon exclusively.

Here’s why:

• People typically change jobs 6+ times during their career.

• When you leave an employer, your coverage does not follow you.

• If you wait to purchase your own policy, age and health changes may increase costs.

• Employer policies usually cover only 1–2x your salary, which is often not enough.

• Accidental death insurance does not replace proper life insurance planning.

For example, if a client needs $500,000 in coverage, I strongly recommend getting a separate personal policy.

Other Types of Insurance to Consider

Gloria:

Are there any other important types of insurance people should know about?

Dan:

Yes. Two commonly misunderstood types of insurance are:

1. Disability Insurance (Not to be confused with worker’s compensation)

   • Replaces a portion of lost income if you become disabled.

   • Can cover both short-term and long-term disabilities.

2. Long-Term Care Insurance

   • Covers elderly care needs when a person can no longer care for themselves.

   • One of the biggest retirement expenses, averaging $5,000 per month.

Additionally, life insurance can be structured to fund a tax-free retirement strategy, which requires careful planning based on individual needs.

Final Thoughts

Understanding life insurance is essential for protecting loved ones, businesses, and estates. Choosing the right type of insurance depends on individual life stage, financial goals, and risk tolerance.

If you are interested in exploring insurance planning strategies, feel free to reach out to us.

Disclaimer:

This webinar is for educational purposes only. The presented information is not investment advice and may change over time. For personalized financial advice, contact info@nestfinancial.net to schedule a consultation.