The Rock and the Ripple

Everyone, at some point in their life, has gone down to a lake, where the water is still, and thrown a rock into the water. What you see are ripples of water moving further and further out from the point where the rock hit the water.

That ripple effect is an analogy I want to utilize today in our discussion about what happens to a family when they properly protect themselves with permanent life insurance – and in particular, whole life insurance.

In the fact pattern where a client is paying for term life insurance, utilizing the traditional concept of buying term and investing the difference, the economic benefit does provide protection. Long term, however, this decision will probably end up as a losing financial proposition for the family because most term life insurance policies never pay a claim.

The premiums that were paid over the life of the policy are, in essence, lost. And not only were the premiums lost, but:

Ripple 1: The premiums could have been invested.

Ripple 2: The potential earnings on those premiums are lost.

Ripple 3: The death benefit is lost.

If you bought a 20-year term policy at age 45, there is a good chance that you will still be alive at age 65 when the plan terminates, so at age 65, you would have lost the death benefit. If that was your only policy, you would be left with no insurance going into the later stages of your life.

Now, let’s say that instead of buying the term life insurance you bought permanent life insurance.

Ripple 1: You would have a guaranteed death benefit for the rest of your life.

The face amount of the policy is guaranteed money to be paid at a future date. It will be income-tax free, and can be utilized in many different ways: family income, equalization of the estate, estate liquidity, taking care of a disabled child, etc.

Ripple 2: At age 65, you still have a death benefit, which would be paid at your date of death.

The guaranteed death benefit could be like a permission slip, allowing you to spend your money differently – and that ability to spend your assets differently might allow you to withdraw from your portfolio a little more aggressively, as we’ve talked about in our Retirement Risks videos and presentations.

Ripple 3: Cash value life insurance provides an alternative bucket of money, which can be a great tool.

If all your money for retirement was in, let’s say, your 401(K) in the market, your cash value insurance policy gives you a place from which to withdraw money in the years that the market goes down, because we don’t want to withdraw from our retirement savings in the years following a market decline.

Ripple 4: Credit Protection, as we’ve discussed in previous blogs.

Ripple 5: The death benefit increases over time.

As your rock, good quality permanent life insurance, when “thrown” into your financial lake, can create many positive ripples.