Making a Large Life Insurance Purchase Without the Proper Advice

One of the most common mistakes made by individuals who purchase large life insurance policies is making life insurance purchase decisions without coordinating their life insurance needs with other aspects of their financial situation, such as investments, retirement planning and tax issues. I see this most often in my wealth management practice with high net-worth individuals.

Certain types of policies are more appropriate for different circumstances. For example, you could end up buying a certain life insurance policy directly from an insurance agent. Your average life insurance agent may not have the prerequisite training and expertise to analyze and evaluate your investment portfolio, estate plan, cash flow and retirement plan prior to making any recommendations to buy life insurance.

Without the prerequisite training and without spending sufficient time getting to know you, it is not possible to recommend a personalized strategy designed to protect and preserve your assets, minimize taxes and increase your wealth.

The fact of the matter is that financial planning for most high net-worth individuals is far too complex for most insurance agents. It involves a number of complex, interrelated areas such as asset allocation, investment planning, retirement planning, insurance needs analysis, tax planning, as well as charitable giving, retirement, special needs and legacy planning and estate planning. What’s more, each area of financial planning is constantly evolving. Those who do piecemeal planning by engaging several different advisors who do not work together are simply fooling themselves and jeopardizing their families' financial future.

Not surprisingly, by making large life insurance purchase decisions without professional guidance and without considering the many complex aspects of financial, tax, insurance and estate planning, many people make critical mistakes that could cost themselves and/or their beneficiaries a small fortune. An independent life insurance agent may not know which policy may be more efficient for you and/or whether the cash value in an existing life policy could be put to better use achieving your other financial goals. In addition, he or she is often unaware of various wealth-building strategies that could increase the magnitude of your wealth.

Make sure you coordinate your life insurance needs with other aspects of your financial situation, such as investments, retirement planning and tax issues prior to making any large life insurance purchase decision. The interesting case scenarios in Chapter 2 of Securing a Retirement Income for Life highlight the need to understand the issues inherent in protecting and preserving your wealth. In Chapter 9, I address how tax planning, trusts for heirs such as children and grandchildren, charitable giving, selection of executors and trustees, asset titling and how the execution of certain estate documents and trusts would prepare your heirs for income and estate tax consequences, if any.

The manner in which you purchase life insurance is particularly important. Done correctly, it can help to ensure your long-term financial security and independence and create from many thousands to millions of dollars in multigenerational wealth. If done incorrectly, it can have extremely adverse financial consequences for you and your family and ruin your plans for retirement and the distribution of your wealth.