When speaking to a group of wealthy people recently, I asked several questions I was pretty sure I knew the answer to.
(1) Do you believe you will spend all your money and assets while alive?
(2) Do you have all your money and wealth at risk in the stock market and
(3) When you die, would you like to leave more wealth without reducing your lifestyle?
You and I may have different views on many matters, but we likely agree on the answers to these three questions. (1) No (2) No (3) Yes.
I admit these questions are very simple and straightforward, however simple is not always easy. Critical thinking readers are processing all types of “what ifs” and “it depends” variables. I would be also. However, let’s keep it simple for a couple minutes.
(1) It is very, very, rare that people who accumulate wealth ever exhaust their wealth during their lifetime. This is particularly true of wealthy people who’ve surrounded themselves with quality advisors in different disciplines, including financial, tax, and legal. Regardless of wealth or advice, the mantra of “protect your investment and savings principle” in retirement is drilled into our heads constantly. This is because we don’t know how long we may live. However, you will not live forever. There is a 100% chance you will die. You will also very likely not die penniless, certainly not if you protected your principle.
(2) I accept there may be disagreement here, as you may have or want 100% of your money invested in the stock market. If this is the case, do you have home equity? Do you own other hard assets of value? If yes, then your answer to #2 must be “No.” In my experience, even very aggressive investors keep 10-30% of their portfolio in non-stock market investments like bonds, commodities, etc.
(3) The answer to this question is the simplest to answer but not for some people. Of course, the answer is “Yes”. If you answered “No” re-read the question. The premise is that you enjoyed your life, spending as you wished, but now you are dead. Of course, you’d want your estate to have a higher value versus a lower value. You control where that wealth goes after you die. You could leave more money to causes you believed in, your children, or whatever. If you had causes or people you didn’t like, you could buy billboards or ad time on television to torment them for years! My point is that whatever you enjoyed in life, you could promote in death, and more money is better than less money in doing so.
Here’s the riddle…If you agree, at least mostly, with the three answers being “No”; “No”; and “Yes”, then why wouldn’t you consider owning as much life insurance as you can get, provided the premiums do not take away from your lifestyle?
When you die (100% chance), all your wealth will be converted to cash and distributed as you elected. Inheritance happens after a certain event -- your death. If you have a portion of your portfolio guaranteed, or at least low risk by not being in the stock market, then the rate of return is likely modest and subject to income tax. It is unlikely you will die penniless, if you have accumulated significant wealth.
So why allocate assets to life insurance? If you qualify based on health, life insurance answers these three questions very well. Life insurance provides a big bag of tax-free cash after a certain event (your death), with no investment risk, and increases the amount you leave behind, that you didn’t enjoy in life.
This article may cause you to question what you think you know about life insurance. Critical thinking applied in this area is aided by how fact-based an allocation to life insurance investment is. Life policies are contracts with definitive terms and pays tax-free money when you die a certain death. If you go back to the three questions I posed at the beginning, the answers are simple. At PCA, we manage money on a Fiduciary basis and offer life insurance on a Fiduciary basis, no commission policies. We are not compensated more for allocating assets to life insurance versus any other investment.
Your individual case facts may render life insurance unavailable or inappropriate for you. This is true of every financial instrument in the world. If you are open to exploring if life insurance may add value in your wealth planning, then let’s do the due diligence.