What Many Don’t Get About Insurance

Need is always predicated on thoroughly understanding your objectives

Key Takeaways

  • The cost of funding estate taxes, without insurance, is substantial.

  • Insurance cash values are similar to owning a long-term bond portfolio with no mark-to-market risk.

  • The “invest the difference” argument holds up only if you are young.

I recently sat down with a very successful professional who finally acknowledged that he needed life insurance to protect the value of his company for his family. He is under 50 and recently bought some term insurance. He was now willing to discuss funding a larger permanent plan that would pay out if he lives to his life expectancy or beyond.

My client had the usual objections I hear from HNW clients and prospective clients. His first objection was typical of someone who is contemplating a large policy:

1. “Do I really need it?

2. “How should I pay for it?

3. “Why shouldn’t I just stick with term, since it is so much less expensive?”


These mental hurdles come up frequently, and any top insurance advisor is able to delineate the issues and help you through the maze of confusion that shrouds this decision. What is the best solution? Let’s look at the first big consideration--need. Some of you don’t care that much about what happens after you die. Others of you want every nickel to go to your family. Still others don’t mind paying some tax, but you want to preserve your best assets and heirlooms for your family. If your goal in estate planning is to preserve your estate for the benefit of your heirs, keep in mind that the cost of paying the taxes and fees from cash flow or liquidity is a form of self-insurance. You not only lose the use of your funds, but you also lose the future earnings.

The cost of funding estate taxes, without insurance, is substantial. Who is going to finance the tax if you don’t have the liquidity? What is it going to cost your family to get liquid? The cost of insurance is a mere percentage of the true cost of the tax. But if you are self-insured, you not only pay the full cost of the tax, but you also pay “taxes on the tax” as well as an interest cost. Self-insurance is not cheap. This is something you have to understand and believe. Do the math. The “invest the difference” argument holds up only if you die young.


You set the rules

Buying term and investing the difference is like trying to compare incomparable asset class returns. This is like saying, “My stock portfolio will beat your bond portfolio.” If we go by historic returns, then this is a true statement most of the time. But there have been a few times when bond returns did beat stocks, even with mark to market risks.

Just think this through carefully. When you invest this difference, where will you invest that sum of money? Will you invest it in fixed return assets, with little or no downside risk, or will you invest it in risky assets that are illiquid and have the potential for total loss? Are you going to buy growth stocks and hope the long-term bull market never pulls another 2008 nosedive?” To make this discussion academic, we need to compare similar asset classes with similar risks. Insurance cash values are similar to owning a long-term bond portfolio with no mark to market risk.


Ask yourself, “Are all your assets deployed in high-risk, low-liquidity investments, or do you own any liquid, low-return assets?” If it’s the latter, then ask yourself if you would rather own the bonds in a tax-free wrapper that provides long-term discounted dollars, or in a taxable world where you can lose 10 to 20 percent of the value if interest rates rise?

If you or someone close to you has concerns about their life insurance coverage, please contact us any time. We’d be happy to help.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.


The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.