Insurance as Foundation for Fiscal Fitness – Part 2
Let’s talk about life. Insurance that is. The primary historical function of life insurance has been the support of dependents in the event the main breadwinner of a family passes away. Grieving and financial peril are not conditions one wants to endure simultaneously. If you are the principal wage earner in your family and your partner (and/or children) are dependent on your income then life insurance is both a smart and compassionate investment. But what if you and your partner both have good jobs on a steady career path? Do you need life insurance?
Now comes the difficult part. Thinking about death is not easy for anyone especially when it concerns your better half. I cannot conceive of a life without my partner. Logically I know it is possible but I also know that her loss would be so tragic and would so completely upend my life that I would not be able to work even though I am perfectly capable of doing so. As she feels the same way, we are in the process of securing life insurance policies so that working to support ourselves will be the least of our concerns if tragedy strikes.
Most parents I know feel the same way about their children. Life insurance policies are not typically recommended for children as they are usually not supporting the family. Some people might choose to go back to work after the loss of a child for the distraction or the comfort of routine. If you are not one of those people, you may want to consider policies for your children as well.
There are other applications for life insurance. Your beneficiary(s) may use the funds to pay off a mortgage, fund a college education or pay estate taxes if applicable. Of course you’ll have to weigh the cost of the insurance versus the benefit. There are many different types of life insurance with associated costs and complexities. Term life is usually the least expensive. The National Association of Insurance Commissioners (NAIC) has comprehensive guides for consumers in the market for insurance. They also have some guidelines for domestic partners such as the use of trusts as beneficiary for life insurance policies. We’ll be discussing trusts in greater detail in future posts. Find NAIC guidelines here.
A couple of final notes… non-traditional couples with sufficiently high net worth ($2,000,000 in 2008) need to consider the impact of life insurance proceeds on estate taxes. Since we are not eligible for the unlimited marital deduction, assets in excess of $2,000,000 will be subject to estate taxes. One tax minimization strategy is to own your partner’s life insurance policy and vice versa. If you pass first, your insurance policy (since it is not owned by you) does not become part of your estate. Proceeds are paid to your beneficiary (presumably your partner). This is a complicated issue and if your estate is approaching this size, I urge you to contact an estate attorney knowledgeable about issues facing nontraditional couples/families.
Finally, if you are working toward the goal of financial independence at retirement or earlier, keep in mind that you may not need life insurance once you achieve it. Most people define financial independence as the state of equilibrium (bliss?) where passive income meets or exceeds expenses. If your financial needs are being met, life insurance may just be an unnecessary expense.
Thoughts to share? Comments are welcomed and encouraged.
Carol Christie is a Registered Investment Advisor and has a fee only financial coaching practice serving individuals and small businesses with a special focus on non-traditional couples.
Photo credit: stock.xchng.