/// By Steven M. Carr & David E. Appel
Life Insurance has increasingly become a versatile and robust tool for meeting the financial security needs of individuals and those they care about. Typically used as a way to replace lost income for your family in the event of untimely death, the applications of life insurance products have been both expanded and focused in purpose in recent decades.
Answering the question, ‘when is the right time to consider buying,’ is not a one-size-fits-all proposition, with the potential uses and benefits of a policy changing over time and dependent on the life cycles of the policyholder—from early adulthood to retirement.
Additionally, life insurance can be utilized for an array of targeted purposes, including estate tax planning, meeting wealth transfer goals, long-term care planning, business succession planning, and as a vehicle for equitable family distributions, among others. We thought it helpful to explore some of the ways that life insurance might fit into your financial strategy at different life stages.
Early Adulthood: Laying the Foundation
In your 20s and early 30s, life insurance might not be the first thing on your mind—but purchasing a policy when you are young and healthy, and premiums are lower, can lock in robust coverage at an affordable price for the long-term.
Such proactive considerations around life insurance can also be a good idea if you have significant student loans or other debts that could become a major burden to your family in the event of your untimely death. A small policy can be designed to cover these obligations, ensuring your loved ones won’t be financially strained by your commitments. Most importantly, securing coverage when you are young can protect your future insurability.
Midlife: Protecting Your Family
As you enter your later 30s, 40s, and 50s, financial responsibilities often increase as your family and net worth grow. Marriage, homeownership, and raising children are common milestones that necessitate a review of your life insurance needs. During this phase, life insurance primarily acts as the classic income replacement, ensuring that your family can maintain their lifestyle if something were to happen to you or your spouse. A policy can be used to cover mortgage payments, fund your children’s education, and provide a financial cushion for your spouse.
At this point in your financial life, you might also want to consider adding a level term or a permanent type of life insurance policy to increase your existing coverage to match the level of your growing responsibilities. We may even want to consider a combination of both term and permanent coverage to build your life insurance portfolio. A term life insurance policy can be an affordable way to ensure that your family is better protected during your peak earning years when the loss of income would be most acutely felt, whereas the permanent life insurance piece gets locked in at a younger age to address your lifetime financial protection goals.
Sandwich Generation: Looking Ahead
Once you get into your 50s and 60s, many have reached their peak earning potential and the financial weight of college age children is in progress. Life insurance needs for income replacement and lifestyle protection continue, but with the end of the burden of college payments in sight and the growing chance of financial demands from our aging parents in play—planning for retirement funding and long-term care needs grow.
Considerations of how life insurance can be tooled to address estate tax issues and bolster weak spots in your overall financial planning picture become important.
Later Years: Planning for Retirement and Beyond
As you approach retirement, your focus may shift from income replacement to wealth preservation and estate planning all together. At this stage, if not well before, working with a financial advisor to modify and target an intended use of life insurance is necessary.
Life insurance can play a critical role in ensuring that your estate is distributed according to your wishes and that your heirs are not burdened with taxes or debts—with designated distributions that are fair, not necessarily equal.
Life Insurance as an Estate Planning Vehicle
For those with significant assets, life insurance can be a very effective estate planning tool. A permanent life insurance policy—such as current assumption universal life, indexed or variable life, and whole life—not only provides a death benefit but can also accumulate cash value over time, offering tax-free growth, and potential tax-free withdrawals. When put in the name of an irrevocable life insurance trust (ILIT), the life insurance value can also be removed from the value of the estate and allows you to maintain more control after death. This income and estate tax free death benefit can be used to cover estate taxes and final expenses, ensuring that your heirs receive the full value of your estate.
In addition, life insurance can provide liquidity to an estate to maintain the desired wishes of legacy planning. If your estate includes illiquid assets like real estate or business holdings, the death benefit from a life insurance policy can provide necessary funds to pay taxes or other expenses without forcing the sale of these assets.
Business Owners: Protecting Key Personnel
If you’re a business owner, life insurance can also serve another crucial purpose by protecting your business through key-person insurance. This type of policy covers the life of a principal employee, whose death would have a significant impact on the company. The death benefit can be used to cover the cost of finding a replacement, training a new hire, or compensating for lost revenue.
Life Insurance for Business Succession Planning
In addition to key-person insurance, life insurance can also help facilitate business succession planning. If you have a business partner, the business can take out a life insurance policy on that individual and be used to fund a buy-sell agreement—ensuring that the surviving partner can purchase the deceased partner’s share of the business, while still paying an equitable share to their surviving beneficiaries. This arrangement both protects the business and provides financial security to the deceased partner’s family.
When is the Right Time for You?
So, with all that in mind, ‘When is the right time to consider life insurance’? Now. The right time to buy life insurance will depend on your personal and financial situation and where you are in life, but talking to an insurance advisor and financial planning advisor about options is always a good idea.
The earlier you start, the more options you have and the lower your premiums will be. You also have a better chance of a lower premium rate locked in at your younger age when your health/lifestyle underwriting tends to be better. It’s important to review your life insurance needs regularly, especially when you experience major life events like marriage, the birth of a child, or the purchase of a home.
It is important to note, for optimized results, the purchase of life insurance should be coordinated with your estate plan through consultation with an estate planning attorney. There are significant estate tax benefits in first setting up a trust to buy the insurance, rather than an individual buying the insurance and later transferring it into a trust that is created later.
Life insurance should never be an afterthought, it’s a versatile financial tool that adapts to your changing needs and can be an invaluable piece of your long-term financial picture. Whether you’re looking to protect your family, plan your estate, or safeguard your business, life insurance can provide the security and peace of mind you need to reach and maintain your goals.
Consider life insurance today and don’t hesitate to reach out to let us help you explore options and find the right policy to meet your needs.
Tax and legal advice is not offered by Lion Street Financial, LLC.
Mr. Carr is a senior partner at the Boston law firm Rubin and Rudman, where he specializes in estate planning and probate administration.
Steven can be reached at:
David E. Appel is Managing Partner at Appel Insurance Advisors, LLC specializing in life, disability, and long term care insurance planning for over 32 years with families and businesses. David has been working closely with Sapers & Wallack since early 2023.
David can be reached at: