Life Insurance – What’s Right for You?

For most people, their home is their largest asset and 70% of Canadians own a home. Most of these homeowners rented at some point, prior to making the decision to buy. This decision was driven by the theory that homeownership is a good, long-term investment, even if it is more expensive than renting. Buying provides the opportunity to build equity.

If our favorite topic of conversation is real estate, it’s probably safe to say that our least desirable is life insurance. Life insurance has a stigma attached to it. I refer to it as having “social BO”. Not long ago, life insurance was sold door-to-door, like vacuum cleaners or encyclopedia sets. Since then, the insurance industry has undergone dramatic change, the extent of which many individuals fail to fully realize.

There is likely no other financial product that is so misunderstood and underutilized than life insurance. People tend to be comfortable with what they understand and are skeptical of what they don’t. Our focus has always been client education, rather than quickness of the process. We like clients to have a full understanding of not just the life insurance products, but the economics and other factors that are going to revolve around their decisions. Some of today’s financial services providers have forgotten the value of personalized service, in their quest to become bigger and create more efficiencies. They have in effect, become like chain restaurants with novel-length menu’s with everything from quesadillas to pad-thai. Unfortunately, it is not uncommon after the bill is paid, for patrons to end up passably full, but far from satisfied or impressed.

While many firms are moving away from individualized service, relationship-oriented professionals thrive on one-on-one meetings with affluent individuals. We believe in the old adage that the key to success is to do one thing and do it very well. Affluent clients have best-in-class expectations, and typically these people do not travel together. We have become experts in life insurance as it applies to corporate and estate planning. We are aware that other providers have ventured into investment planning and property & casualty insurance. To follow suit would not allow us to maintain our myopic focus in areas of life insurance.

Since people tend to understand home ownership, we try to relate similar concepts in helping them to understand life insurance. For example, if you are visiting a city, you likely are paying a nightly rate at a local hotel. If you decide to remain in this city for a year or two, you are probably seeing a rental property with a one or two-year lease. For purposes of this discussion, let’s assume this is a one-year rental agreement. As long as you make your monthly payments over the course of the year, you maintain a roof over your head. At the end of this term, you renew your lease agreement, likely at a higher cost. This same concept applies to longer-term leases of 5 or 10 years.

Similar to this idea, you can “rent” life insurance. This is available in 1, 5, 10, 20- year terms. At every renewal the cost will increase. Eventually, it becomes so cost prohibitive, that people are forced to drop their coverage. This is why statistically, less than 2% of term life insurance policies ever pay out.

Lifetime level premium became the solution to this complaint. People paid a little more now for their coverage and a lot less later. Cash value was only a necessary reality of that level premium concept. The concept of growing cash, exempt from tax is very appealing. However, sometimes we focus on the wrong things. For some, the sole purpose of owning life insurance was the ability to accumulate cash. These people became critical and felt that the cash value wasn’t responsive enough to economic factors, not understanding that life insurance is not intended to provide quick, short-term gains. It turns out that “risk tolerance” is a great concept until you test it in your own portfolio, with your own emotions. The very real possibility of losing your invested capital like 2008 and 2009 showed us, sends many more people than we thought heading for the exits.

There are so many pure life insurance needs both personally and in business. The first determination that must be made is, what would the client like their planning to accomplish? Permanent life insurance is designed for people with a long-term focus of generational wealth. As Warren Buffet has stated, “You should never bring an asset onto your balance sheet that you are not willing to live with for a long time”. Permanent whole life insurance is timeless and has always been an essential tool for those who understand it and apply it appropriately.

Life insurance, it’s fair to say, is a subject that provokes strong opinions. Those who don’t like it probably don’t understand how it can be of value to them. We have all the products at our disposal, but it takes a competent advisor to make them work for the current economic and personal factors part of everyday life. There are no “bad” insurance products, only bad applications of products. Meeting today’s sophisticated life insurance needs is a highly discerning art.

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