Life Insurance - Coffin Kitty or Smart Investment

Life Insurance – Coffin Kitty or Smart Investment

By

Marsha Walker Eastwood, B.S.Ed., MSHSV

The history of life insurance is long and storied. As far back as 700 BC, the ancient Romans set up collections to bury their friends so that whoever died next would be put away honorably. Each week a certain amount was chipped in to a “kitty” to spare the family undue angst when a wage earner died. This system was not without its pitfalls and shortcomings. After all, it was the honor system and when the “friends” died it was not incumbent upon their offspring or disinterested others to continue the trend. Contributions to the Casket Kitty were deemed to be not only a responsibility but a priority since leftover monies were used to support the widow and/or family of the deceased.

Fast forward a few centuries and not only has time rearranged priorities including the business of death but also the post-death life for the survivors of the deceased. Quality of life and financial survival beyond the working years make a  prevailing argument that supports why purchasing life insurance must rank high on the list of personal priorities, especially for women as policy holders and beneficiaries.

Social inclusion comes with a price tag that often involves robbing Peter to pay Paul, especially for women. Looking good oftentimes trumps future financial security. Hair, nails, clothing, handbags, shoes, makeup, and tickets to concert venues are at the top of the robbing lists of many women. Absent from that list is life insurance is a life insurance premium because the thinking is always “I’ll get around to it,” or “Somebody will see to things when I’m not around anymore.”   The problem with that thinking of course is that none of us knows how much or how little time we have nor any guarantees that somebody else will see to things…

When it comes to procrastination or the “I’ll get around to it,” A national poll by Wholesale Insurance, an industry information source, finds 43 percent of adult women have no life insurance. And among those who are insured, many are underinsured, carrying roughly a quarter of the coverage necessary for their needs. This statistic includes the more than 58.6 women in the American workplace and according to Bureau of Labor Statistics they carry 31 percent less life insurance than men in the workplace. This statistic also raises the question as to why women don’t purchase life insurance. The top cited reasons were cost, complexity, lack of financial literacy, and no professional go to person such as a financial advisor.

When it comes to the issue of financial literacy it is important for women to understand the logic behind buying life insurance. Whether you are a stay-at-home mom, a single parent in the workplace, or a married woman in the workplace, you provide financial value to your family. If your income helps to support you, your children, and/or your partner, a life insurance policy will provide financial support for them in the case of your death. This can help cover not only expenses associated with your death but also with everyday living expenses.

Other reasons to consider a life insurance policy includes:  If you carry high debt, have a co-signor on a loan or if you are caring for an elderly or infirmed relative, life insurance will protect your co-signor and your estate as those you care for. That same scenario played out without life insurance, upon your death, your executor will sell off your belongings for pennies on the dollar to settle your debts, and your co-signor will be left hanging and responsible for the entire balance of the loan debt. Even if you are your only concern, bear in mind that life insurance is cheaper when you are younger. Insurance rates are lower for women based on longer life expectancy.

Now that the need for life insurance has been outlined and/or justified, you need to take a look at how to calculate just how much you need. A financial planner will sit down with you and ask questions about your income, assets, and debts. That information will then be plugged into the DIME formula.

DIME stands for debt, income, mortgage, and education. The D includes all debts other than your mortgage and expenses associated with your final disposition. The I include deciding how many years your family would need support, and then multiply your annual income by that number. The multiplier might be the number of years before your youngest child graduates from high school. These figures will be used to compute your income replacement needs. The M calculates the payoff amount of your mortgage. The E is an estimate of the costs of sending your kids to college.

Now that you have an idea you will need to figure out how to pay for it, and you have options. First, consider the premium(s) a part of your monthly budget as opposed to one large purchase. Second, consider purchasing multiple policies. Andy Tilp, president of Trillium Valley Financial Planning suggests a potential buyer  “Consider buying multiple, smaller life insurance policies, instead of one larger policy, to vary your coverage as your needs ebb and flow. “This can reduce total costs, while ensuring adequate coverage to the times needed. For instance, you could buy a 30-year term policy to cover your spouse until your retirement and a 20-year term policy to cover your children until they graduate from college.”

Once you have decided to move forward with purchasing a comprehensive life insurance policy, questions regarding taxation of benefits are sure to arise. With the purchase of the policy, you are creating an immediate estate, and according to IRS when the beneficiary of a life insurance policy receives the death benefit, this money is not counted as taxable income, and the beneficiary does not have to pay taxes on it. However, a few situations exist in which the beneficiary is taxed on some or all of a policy's proceeds. If the policyholder elects not to have the benefit paid out immediately upon his death but instead held by the insurance company for a given period of time, the beneficiary may have to pay taxes on the interest generated during that period. When a death benefit is paid to an estate, the person or persons inheriting the estate may have to pay estate taxes on it.

As with any major financial decision, consulting a financial advisor is extremely important. This is the professional who can guide you through the process and help you understand the formula used to calculate how much life insurance and what type is recommended for your situation. Brandon R. Redman, managing partner at Securian Advisors Northwest suggests "If the plan is to take cash value out, it's important to also look at favorable policy loan features. Make sure to work  with a broker who represents numerous companies.”

There is an old saying that some beats none, and for those individuals who cannot commit financially to an optimal life insurance policy, there are other less inclusive options available from legitimate outlets. However, as with all things, buyer beware. As for the GoFundMe Casket Kitty approach, remember in addition to grieving your loss, using this method to pay for your final event creates an unimaginable amount of angst for your loved ones. Their pleas to strangers to pleas to help bury their relative joins a pool of thousands of other pleas for everything ranging from Please Save My Pet to Please Give Me the Wedding of a Lifetime, and there are never any guarantees. There is another old saying that says a life of prevention is worth a pound of cure and a life insurance policy can do just that.

©Marsha Walker Eastwood

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