Insurance is a cost you hope goes to waste

I was in a recent meeting with a client who had built an estate to a level where they no longer needed life insurance.

Initially, that bred some disappointment that all those years of term insurance premiums went to waste. The alternative was death.

Ah, but the client could have bought cash-value life insurance that would have allowed for keeping the death benefit and borrowing from the policy for cash needs. Great deal? Usually not.

Insurance doesn’t need to be confusing. At its most basic, the purpose of most insurance is to protect you from potential costs that, without insurance, would be significantly painful or, even worse, devastating.

For example, you can most likely absorb the costs of a fender bender while leaving the dealership parking lot. But if you put that new car in drive rather than reverse and totaled it, you might have some issues.

Life insurance creates an estate for your heirs before you have a chance to build one. It ensures that your spouse and your kids are taken care of in the event of your untimely passing. But once you have retired and are living off of your Social Security and assets, why do you need life insurance?

That’s why term insurance solves most problems. If you have a very large estate, you could use more complex planning to own life insurance that can help with estate taxes. That’s especially true if the reason your estate is large is because you have assets that don’t easily convert to cash (a business, extensive real estate, etc.). But as a savings vehicle, there are generally better alternatives.

You can adjust your costs by having higher deductibles. The more claims you have filed, the more your costs tend to go up and the less flexibility you have in changing carriers. Things like using your towing coverage or windshield repair look like they are free, but insurance companies still consider them when developing your rating.

Long-term care insurance has had increasing rates and often goes unused. It rarely makes sense today.

Don’t buy insurance that is wasteful, but hopefully the insurance you buy will go to waste.

Spend your life wisely.