Life Insurance For Executives
By Jason Berube | Financial Planning , Risk Management
Life Insurance For Executives
What Business Professionals Need to Know About Life Insurance
Life Insurance For Executives
I started my financial services career with a life insurance company in 2009, WOW-I cannot believe it has been that long! As an executive, you may have spent your whole career climbing the corporate ladder, and, as I have seen first hand, life is unpredictable. There are many types of insurance, features, and funding options available to you and at the foundation of financial planning, addressing risk management is essential. With so much at stake for your family, I will cover a few common mistakes I see made and how to avoid them.
Wrong Type of Life Insurance
There are many different life insurance types with different features, benefits, costs, and drawbacks. They include: Whole Life, Variable Life, Universal Life, and Term. There is also Variable Life, Indexed Life, or even Final Expense Insurance, but I will save those types for a later conversation.
It is not uncommon for Financial Planners to have new clients come in with an inappropriate life insurance policy. Commonly, families may have bought a Whole Life insurance policy or a Universal Life insurance policy when they needed Term Life protection. Sometimes the reverse is true as well. The protection choice you pick should fit the unique needs of your family. Therefore, it may well make sense to get a life insurance audit done by a fiduciary Financial Planner to ensure that you have the right type of insurance. That could save your family significant time and money.
Ownership Structure
Did you know there could be a wrong way to own a life insurance policy?
When purchasing life insurance, most people are not properly advised that their death benefit could be taxed due to the way that it was purchased, owned, or funded. You may be thinking “But, I have been told life insurance death benefits are tax-free” and at a macro level, that is partially correct. Life insurance benefits are in fact income tax-free. However, they may not be estate-tax free. If the ownership of your insurance is not organized appropriately its proceeds may be included in your taxable estate and become a taxable asset and result in an unexpected tax.
For example, let’s assume you own a $2 million life insurance policy. Because the policy exceeds the $1 million Massachusetts Estate Tax Exemption, the entire amount plus the rest of your estate could be subject to the Commonwealth’s estate tax. Your insurance death benefit will be paid income tax-free, but it may become subject to estate taxes.
A potential solution could be to create an Irrevocable Life Insurance Trust (ILIT) to own your life insurance policies. An appropriately designed ILIT may help you minimize your estate tax liability.
Captive vs Independent Agents
Where you buy your insurance can likewise be a significant factor while deciding if you have the best possible protection. Most people purchase life insurance in two ways, either through a “captive” life insurance agent or an “independent” life insurance agent. A captive agent is an insurance agent employed by a specific insurance company (i.e. NewYork Life, Northwestern Mutual, Guardian, etc.) An independent life insurance agent, on the other hand, is not employed by any insurance provider so they typically have access to a wider range of insurance providers and solutions, potentially allowing their clients to pick the best solution at the best price.
Why does it make a difference where you buy your life protection? Simply, because captive life insurance agents are often incentivized to sell their employing firm’s policies over those from external providers. Sadly, this can bring about the acquisition of an insurance policy that may cost you more than it needs, or it might not be enough coverage, or it may not have all the features you need.
An independent agent is able to consider multiple competing insurers in order to access policies that may better fit your needs. There is no additional cost to purchase a policy through an independent agent or going to the insurer directly. In most cases, independent agents have access to the same policies as captive agents. Purchasing insurance through an independent agent may reduce conflicts of interest, by removing the captive agent’s company-specific incentives.
With the many different life insurance types, features, and funding options available, you need more than an insurance product, you need the right solution for your unique needs.To make sure that your life insurance needs are covered, simply reach out to us for an evaluation.
PS: Insight Financial Strategists does not sell life insurance or other products that pay commissions. Therefore, we are able to be objective when evaluating your life insurance needs.