Why do financially successful people buy life insurance? It may surprise you that the answer has little to do with costs. “Discounted dollars” – while having a lot of sizzle – is not the real reason people use life insurance.
Consider someone who has managed to build (and, in today’s economic climate, preserve) a comfortable net worth. They may have saved. Or they invested in real estate or a business. Maybe they inherited it and saved instead of spent.
John and Mary are two such people. They’ve managed to build themselves a very comfortable net worth. But John and Mary are worried. They’re not worried so much for themselves as they are for others.
Those others may be children, grandchildren or other family members. Or they may be co-owners in businesses or the employees of those businesses. Maybe John and Mary have, over the years, given a lot of time and money to their community, to the colleges they attended and to other charities. They may want to make sure there is enough to continue those charitable interests after they die.
The common underlying thread in their worries is a need for cash soon after death. It may be the cash to pay estate taxes (even with the increased exemption amounts). It may be cash so the business can buy John and Mary’s interest or it may be cash needed to make sure charitable hopes and dreams can be realized.
Put yourself in the position of the family or business shortly after John and Mary die. You are one of those who now must come up with cash needed to take care of the things John and Mary were worried about.
What are your options?
Perhaps John and Mary squirreled away a bunch of cash. When you go into their home, you may find an old footlocker filled with hundred dollar bills. Or maybe shortly before they died, John and Mary turned everything into cash and all you need to do is write a check. Maybe. But not likely. Successful people usually didn’t get there by keeping cash lying around.
Your second option is to sell the things. Sell the business. Sell the real estate. Sell other things to raise the cash. You just hope you’re not forced to sell at the ‘wrong’ time – when the market is down or when everyone else wants to sell. Sellers do not like a fire sale.
Finally, maybe you can raise cash by borrowing it. If we’ve learned nothing else in the current financial crisis, it is that money does not always flow freely. Even if borrowing is an option, it can be a spendy option. Someone must pay back the principal and interest. You probably shouldn’t count on a government bailout to help.
Did you notice who makes the decision which option to use? Who decides if it’s best to use cash, to sell things or to borrow the money? Is it John and Mary? While they may done things to make the choice a little easier (i.e. tucked money in the foot locker), someone else makes the decision.
Do I hear you saying, “So what?”
Over the years, I’ve observed something about people like John and Mary. They often share certain personality traits with other successful people. Three come to mind. Successful people tend not to procrastinate. They don’t make others fix problems they caused (including “problems” like an estate tax bill). And they address the most important problems first.
May I suggest that having others decide how to take care of John and Mary’s ‘problems’ flies in the face of those basic character traits. It is procrastinating taking care of the problem. It is asking others to fix John and Mary’s problems. And, because it delays solving those problems until after they die, it is hardly taking care of the important things now.
However, if John and Mary buy life insurance so that family and business co-owners have cash in the future, they have taken care of their problems today. They have not procrastinated. They have provided a ‘fix’ for the ‘problems’ caused by their success. And they have addressed the important problem first – the problem that could derail other plans likes wills, trusts, buy-sell agreements and plans for a charitable legacy.
I remember, some years ago now, sitting across from a client who was wealthy. He owned some $15 million equity in prime commercial real estate., a two engine plane and much more. (This was back in my law practice days.) We spoke about estate taxes and charitable dreams and about making sure that his real estate business would be able to continue if he and his wife should die. I asked him what his plans were so the kids (he had eight of them) could come up with the cash they would need. And, like so many others, he outlined three options: cash, sell, borrow.
After he was finished, I asked him a rather strange question (at least he thought it was).
“Chris, do you suffer from multiple personality disorder?”
For a few seconds he just stared at me. Then he responded, “Why would you think that?”
“Chris, you’re talking about options that conflict with what I know of your personality.”
A few more seconds passed. “What are you talking about?”
And here’s what’s important to remember. “Chris, your personality is much like most of my clients who have managed to do well financially.” I went on to explain those common traits. And then I told him that in talking about cash, selling things and borrowing, he was talking about decisions the kids would be making and that he was postponing taking care of the problems that existed today.
And then we talked about life insurance. I explained how it fit the way he did things. We did not talk about the cost because I didn’t know what the cost was – I was an attorney, not a life insurance agent. I explained that the biggest share of his problems could be solved with cash. Cash to pay the estate tax. Cash to buy a business interest. Cash to create that charitable legacy. And I told him that life insurance delivers the cash when the family needs it.
Is cash the complete solution? Of course not. Planning is about more than just cash. It also involves deciding who should get the things you own, when they should get them and whether any special management is needed. Those questions take time to answer, and the plans needed to deal with them take time to develop and set up. Cash is, however, often the biggest issue. Once you solve that problem, you can leisurely work on the others. And, even if you never get around to them, the top priority will have been taken care of – again consistent with how successful people live their lives.
You and I (and the accountants and attorneys) can debate all day long about the cost of using life insurance compared with the other options. But so what? Instead of focusing on the cost, focus instead on the other benefits of life insurance – especially those that make actions consistent with beliefs.
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Copy of article posted at News and Reviews: Home for Global Indians
I agree with much of what you wrote. The reason I have substantial life insurance is so that my wife and children will NOT have to make any decisions — based either on need or emotion — in the event I die early. I have much peace of mind knowing that if I die early, they will not have to go through the trauma of worrying about how the bills will be paid, college can be afforded, etc.
I learned from personal experience — the death of my biological father at an early age — that some planning on the part of my parents would have likely changed the course of my life in a much more positive way.
They say life insurance is for the living…believe it.