- Having life insurance typically makes sense if you lack the financial
resources needed to fill a financial gap if you were to die.
- Do the math to ensure you aren’t significantly over- or underinsured.
- Evaluate the four main ways to pay for insurance premiums to
select the approach that is best for you and your situation.
Life insurance can be an extremely important, even essential, part of your financial plan. One
of the most attractive aspects of life insurance for many individuals and families is the death
benefit of the policy—the money that the insurance company pays out in the event of the
Trouble is, navigating the life insurance landscape can be tricky—and people often make
costly mistakes. Three of the biggest we see regularly:
• Buying too much—or too little—insurance due to a lack of understanding of their true
• Paying for life insurance using a less-than-ideal method or executing that payment
• Misunderstanding life insurance’s purpose and the reasons for having it by viewing it
(incorrectly) as an investment vehicle
In order to make smart life insurance decisions, there are three questions you need to ask
yourself and answer (see Exhibit 1)—perhaps with the guidance of a high-caliber professional
who understands the many ins and outs of life insurance.
Question #1: Why might I need life insurance?
Life insurance can be a very versatile tool, capable of replenishing an estate to cover various
taxes as well as creating wealth. Nevertheless, there is only one reason to purchase life
insurance: You lack the financial resources needed to fill a financial gap if you were to die.
That gap might involve:
• Family. Consider the people you love, such as your children. You want to ensure they
would have a solid financial base (however you define it) if you were to die. Very often the
best answer is using life insurance to create an estate for them.
• Financial obligations. Life insurance proceeds can be used to pay estate taxes,
enabling children or other loved ones to keep wealth that would otherwise be paid to
the government. Likewise, entrepreneurs regularly use life insurance to fund buy-sell
agreements with business partners. This can help ensure their families will be properly
taken care of. There are also circumstances in which you might owe a person or an
institution and use life insurance as a form of collateral.
• Charitable impact. Many people want to support worthwhile charitable causes so they
can have an impact on the world—or a chunk of it, at least. Life insurance can be used to
fulfill their commitments to the philanthropic organizations they support.
Important: Be very clear about why you want life insurance. Carefully and critically think
through the outcomes you are trying to achieve and the role life insurance might be able to
Question #2: How much life insurance do I need?
Let’s say you determine that life insurance is something you need. It’s then time to turn to
the matter of amount.
The answer to this question is based on your answer to the first question. When you know
the purpose of having a death benefit, it is possible to decide just how much life insurance
you need to get.
Examples: Say you are looking to create a larger estate to ensure your family would
be financially secure if you died. A lot of factors can be considered to come up with an
appropriate death benefit. How sophisticated you get depends on you and any advisors you
enlist for help. For example, you might create cash flow projections to determine how much
money your family would need to pay for specific projected expenses (education, health
care, etc.). By including projected investment returns in the calculations, you can arrive at the
size of the death benefit your family would require to fund critical financial needs.
Or say you have a business you plan to pass on to your daughter. Although your son has
different talents and interests, you still want to leave him an inheritance—and you want things
to be “fair” for both. Life insurance can be used to equalize their inheritances. Based on the
financial value of the business you will be leaving to your daughter, you can determine how
much life insurance you will need in order to leave your son a comparable amount of assets.
The upshot: Ascertaining how much insurance you require is fairly straightforward—but
only once you are perfectly clear about why you need life insurance. Therefore, you should
buy the amount of life insurance that matches your needs—and no more.
Question #3: How should I pay for my life
Once you know how much insurance you need, you can consider various ways to pay the
premiums. Basically, there are four approaches to paying premiums:
• Pay the premiums out of pocket. The least complicated and most direct way to pay
premiums is to write checks for them as the premium notices arrive.
• Have a third party pay the premiums. If you are an entrepreneur, your company might
be the appropriate entity to pay the premiums. Similarly, grandparents can pay the
premiums for their grandchildren. (Note: There are rules that need to be followed to
enable third parties to pay life insurance premiums without adverse consequences.)
• Borrow the money to pay premiums. This approach is known as premium financing.
There are a number of different ways to use loans to pay premiums, but expertise in this
area is often a necessity to use loans successfully.
• Leverage your retirement plan to pay premiums. Business owners may be able to use
funds in a qualified retirement plan to buy life insurance. A nice benefit is that pretax
dollars are used to pay premiums.*
There are advantages and disadvantages to each approach. Which one works best depends
on a wide variety of factors. But the first step is to understand that you do have options to
consider—there isn’t simply one method.
Being smart about purchasing life insurance
There’s one more issue that you may have to face when considering life insurance. For
the great majority of wealthy and successful people, purchasing life insurance requires
the expertise of professionals. At the same time, an all-too-common complaint about life
insurance is that it is sold aggressively. Sometimes, that complaint is very justified!
If you can answer the three questions above and explain the logic behind the answers, it
is more unlikely that you will end up with life insurance that does not match up well with
your needs and wants. There are industry experts who can help you think through the three
questions as well as help you put any life insurance in place.
Action step: If you are the least bit unsure about the professionals you are presently working
with—or the life insurance you currently have—it is probably a good idea to get a second
opinion about your situation. A second opinion review can help you determine whether you
are on track with your finances and, if not, steps you can consider taking to get on the right
Contact your financial professional to get a second opinion about your life insurance needs
and any existing life insurance policies you have in place.