Life Insurance – It works differently for different audiences

The words "Life Insurance" seem to create a handful of predictable responses from people: aversion, confusion or interest. It’s loaded with stories of high-pressure sales tactics and, while some of that reputation has been well earned, the reality is that it’s a financial risk management tactic and should be measured like any other.Sadly, many individuals, families, and businesses fail to explore where it may fit because of preconceived ideas about it.How would you measure its fit for you? Here are a few key questions:

• Is the investment (the premium paid for the contract) a good use of capital?
• Does it complement your financial and risk management goals?
• Does it complement your investment strategy?
• Does it complement your estate plan?
• Is it tax effective?

If it’s a fit, then new questions arise, such as: "What’s the right amount and which product fits best?" The answer varies based on the audience, so let’s look at those scenarios.For those who are earlier in their financial journey, the answers are fairly clear – invest in enough insurance to cover your entire debt load including mortgages, bank loans or any other notes, and enough to replace the income that would be lost.In a business setting, insurance needs to be sufficient to fund the buyout of a shareholder or provide funds to hire a deceased key person, as an example.For established businesses, families with multi-generational wealth, and wealthy individuals life insurance starts to take on a very different role than traditional approaches. It becomes about tax.The tax advantages in more sophisticated environments are compelling. For example, death benefits can be paid out tax-free and cash values can accrue on a tax-deferred basis. In a corporate setting (CPCC) life insurance death benefit proceeds can create a credit to the Capital Dividend Account with can unlock cash trapped inside a corporation. With the proper beneficiary election, personally owned policies have a level of creditor protection that’s unequalled by other assets.Life Insurance is a tool. Like any other tool, it needs to be used at the right time and in the right way. For wealthy families wanting to magnify their impact to philanthropy and/or looking to transfer wealth to future generations, the after-tax rate of return of the death benefit of a life insurance policy can be nothing short of impressive. It’s worth understanding.