Financial Planning

Life Insurance Series Part 1: What is the Goal of Life Insurance?

In cases where you are not comfortable managing the risk, an insurance product can fit that void.

As a person develops their overall financial plan, part of the focus will include risk management. You are all aware that we face countless risks every day: there is the risk of an automobile accident, the risk of incurring a disability, the risk of getting sick, and in the most extreme case, the risk of dying, just to name a few.

Whether or not you actively consider the chances that you take, there is a certain level of risk that you are willing to live with in the short and long term. In cases where you are not comfortable managing the risk, an insurance product can fill that void.

Transferring Risk

What insurance does for you is simple – it transfers risk. In exchange for a regular premium, insurance companies take on the risks that you will require long-term care, that you will die, that you will have an accident, and so on. This understanding of insurance should make the decision clearer of whether or not to invest in a policy.

If you choose not to buy a particular insurance policy, you are taking on a certain degree of risk.

Let’s use flood insurance as an example. Whether you live in a flood zone or a desert, if you do not buy flood insurance, you are basically saying, “If my property floods, I am shouldering the risk of repairing any damage.”

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Copyright: aleutie / 123RF Stock Photo

However, if you purchase an insurance policy that includes flood coverage, you successfully reduce your risk level by transferring the risk to an insurance company. By purchasing a policy that covers flooding, you are now saying, “If my property floods, I am prepared and my savings will not be destroyed by a flood. The insurance company is taking on the risk of flood-related damage.”

Life Insurance

Now, let’s use an example for life insurance. Life insurance protects the risk of someone dying. Let’s say you are the primary income earner in your family of four, which is made up of you, your spouse, and two children. Some other information: your household relies on your income for day-to-day cash flow needs, you have no retirement plan, no pension, and you add to your children’s 529 Plans every year.

In this case, a lack of a life insurance policy would say, “If I die, my family will be responsible for all future income needs, and my children will use what is existing in the college funds for their tuition costs.” Let’s say you own a life insurance policy to cover all sources, your current situation would be: “If I die, my life insurance death benefit will provide 3 years of income for my family, provide a small nest egg for my spouse to invest for retirement, and cover all college tuition for the children.”

Conclusion

This is just one conceptual example of how life insurance could be used. Life insurance can also be used as a piece of your “asset allocation pie,” to fund a trust, business succession planning, and much more. For an insight on how much life insurance you could need, see my next blog post in the Life Insurance Series.


Kelsey Dolfi, CPA. RiverStone Private Wealth Advisors, 7 Livingston St. Rhinebeck, NY 12572. 845-516-4440. kdolfi@riverstonepwa.com Securities offered through Commonwealth Financial Network, Member FINRA/SIPC.

Kelsey is a Wealth Planning Advisor and Certified Public Accountant at Marshall & Sterling Wealth Advisors, located in the New York tri-state area. Kelsey enjoys working with those who feel they find themselves juggling various financial goals and they aren’t sure where to put their money first. Whether it’s saving for their children’s education, maximizing corporate benefits large corporations, or wanting to know if they can afford that dream upstate house, she helps them pull the pieces together into a clear path to success. Kelsey has an MBA and B.S in Accounting from Alfred University. She also holds her Series 7 with LPL Financial, Series 66 with LPL Financial and Marshall & Sterling Wealth Advisors , and New York life insurance and annuity license. Prior to working in wealth management, she worked as an auditor in both the public and private accounting industries. In her free time she enjoys running and exercising, reading, and she is an enthusiastic supporter of local businesses, specifically in the Hudson Valley. She can be reached at reached at kponesse@ms-wealth.com or 845-554-1046 x2353. You can read more about Kelsey and Marshall & Sterling Wealth Advisors at www.ms-wealth.com.

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