by John Blatt

The Value of Life Insurance as a Planning Tool

Life Insurance has been misrepresented and misunderstood as a planning tool for many years.  It has been promoted as an investment, recognized  for tax advantages such as  tax deferred accumulation, and delivering a tax free death benefit.  It has also been a keystone of many individual plans and corporate benefits plans because of these tax advantages. But along with these touted benefits comes complexity, leaving individuals questioning whether the strategy they’re employing is right for their planning.

Different Types

There are different kinds of life insurance that can be designed for a personal plan or business application and the purpose of the coverage often times dictates which type of policy can be utilized. For example, if an individual or business was interested in having the most death benefit for a specified period of time at the lowest possible cost then term insurance would be an ideal policy. When someone borrows money to buy a home, or a business borrows to purchase equipment or build a facility, having a life policy large enough to redeem the debt is generally preferred by banks and financial institutions. The SBA often mandates that a life policy be in place as collateral for the loan, naming the bank as beneficiary in the event the business owner dies prior to the repayment of the loan. Term insurance can also be a great fit here as well.

When the length of time a policy may be needed is uncertain or much longer, the type of policy used might be one that offers either a level fixed or a flexible premium  structure. High net worth individuals and families often use level fixed and flexible premium policies to deliver a death benefit to provide funds that cover estate taxes and transfer costs while businesses might use these policies to indemnify against the loss of a business owner or key person. Legacy benefits and their associated costs are provided through these policies as well. Another advantage of fixed level or flexible premium policies is that an individual  can own the policy for a longer period of time than originally intended but for a different purpose without having to continually prove they are still in good health as they get older.

How Much?

There is a difference between having the right amount of life insurance versus having the right kind of life insurance. A young couple starting a family may want coverage to redeem a mortgage, provide for replacement of income and make up for lost retirement savings that never happened due to a premature death. This could require an amount of insurance equal to 5- 10 times the individual’s annual earnings – a large number indeed. Their budget could be stretched trying to afford the coverage and so they use term insurance. Fast forward 10 years and now the family has grown and moved to a bigger home with a bigger mortgage. Annual incomes are higher and some asset accumulation has occurred but now they want the coverage to provide for education costs that aren’t funded yet. Fast forward another 10 years and educations costs have been provided for but now there’s a vacation/retirement home on the horizon and the life insurance that was needed 10 years earlier can be used to ensure the additional home can become a reality and stay in the family if the breadwinner dies. Another decade passes and legacy wishes to provide for grandchildren has become a planning priority and that can be guaranteed through life insurance. In all of these scenarios, the need for insurance may be declining over time but it never goes away. At the same time, the purpose for the insurance is constantly changing, which may in turn change the type of policy desired.


At the end of the day, true financial planning is focused on accomplishing goals. Although proper savings and investing are a huge part of that goal attainment, all of that can crumble in a matter of weeks due to death. Life insurance is the bedrock of a properly designed financial plan that will endure for decades allowing for the unexpected modifications that will result as life unfolds.

Cleveland Wealth, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.