Life insurance (and I know this is going to be heresy to some financial planners and insurance brokers) is not for everyone. In other words, not every needs life insurance (gasp!).

In my practice, I’ve seen clients who are 25 years old or so come into my office with whole life insurance policies and they have no kids and no dependants. At that point, I’m usually saying to them, “What were you thinking?”

Life insurance should only be bought when you have people who depend on you and would suffer financially if you were to pass away. If you have kids; Aging parents; dependant spouses or siblings.

Based on this, guess how I feel about those Gerber baby life insurance policies…

Life Insurance – What kind should you get?

There are several different types of life insurance. Mainly, term life, whole life and universal life. Universal life insurance policies are a rip-off. They don’t do anyone any good except for the insurance broker who sold it to you because they get a huge commission for it. Whole life policies are a little better than Universal Life but for most people, they’re still unnecessary. Also, the insurance broker also gets a big commission for selling Whole Life policies.

The type of life insurance that fits most people are the Term policies. Term life insurance, by definition, is not permanent. Life insurance is not something that was meant to be permanent. You choose the term of the insurance depending on who you need to take care. For example, if your dependants are children and you have a 5-year-old child – a 20 year level term policy will get your kid through the age of 25. Presumably (and hopefully), they’ll be independent by then and you’ll no longer need life insurance.

Life Insurance – How much should you get?

There are several schools of thought on this. Some simply use a simple formula by multiplying your yearly income by 20. Usually a more precise calculation will take your yearly income and use that to ask the question “How much insurance would you need to generate that income if the whole payout was simply put in a savings account at a bank?” Remember, life insurance is suppose to replace your income if you were to pass away so your dependants won’t feel a financial burden. You want the lump sum payment to generate interest and therefore income for your family, not simply spend down the payment over time.

Life Insurance and Estate Planning

This is what I really wanted to get to in this post. I’m not a certified financial advisor or planner so therefore I don’t give individual and specific investment and financial advise. I do however, estate plan for people and that involves having a good knowledge of the different financial instruments that couples have and how best to own, move and arrange them to best suit my client’s needs.

First, the beneficiary designation of your life insurance is very important. If it is a large policy, for tax reasons, you might want to consider having the beneficiary of the life insurance be a trust that you set up instead of your wife or children.

Second, if you name your children as the beneficiaries, remember that minor children cannot inherit money outright. Besides, if you had a million dollar life insurance policy, do you really want your 10-year old child to carry around a million dollars with them, to spend as they wish? Didn’t think so.

Third, if you’re thinking about buying life insurance, in addition to speaking with a financial advisor, speak with an estate planning attorney as well. For estate tax purposes, sometimes it is better to have life insurance bought a certain way by either your spouse or a trust, then to buy and insure yourself. If you don’t have a will and estate plan, when you think of buying life insurance, it’s a very good time to consult with an estate planning attorney and simply have everything set up all at once. It’ll save you and/or your loved ones a lot of grief and heartache down the road.