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By Liza Horvath


Insurance: Love It or Hate It


Life insurance and annuities enjoy a love/hate relationship within the legal and financial communities. If a young family wants to be sure important income is replaced should the major breadwinner die, a life insurance policy can be the perfect solution. However, if a senior is sold an annuity late in life, it can be found to be financial elder abuse. Knowing how insurance can be used effectively and its appropriate deployment determines whether we love it in a particular instance, or hate it.


Term life insurance for a young parent is usually inexpensive and is commonly used to replace lost income should a parent die while the family is still financially dependent. Life insurance creates immediate liquidity on the death of the insured and, because of this, insurance is key to many successful financial plans. Companies purchase key-man insurance on valuable executives because they realize that if an executive dies unexpectedly the company could sustain financial damage due to the vacancy in leadership. Insurance can also be used to fund buy-sell agreements between partners in a company so a forced sale of the company can be avoided.


Historically, life insurance – specifically second-to-die policies – was purchased to create liquidity at the death of a husband or wife to pay estate death taxes. With the higher estate tax threshold, second-to-die policies have become less popular, but keeping those old policies can still be a good investment.   


Holding a life insurance policy that will benefit the family can result in more success in an investor’s stock and bond investments. How? Investors often take more investment risk with other assets when they own a life insurance policy because they know the policy will be there should they lose on those riskier investments. Higher risk usually equals a higher potential for reward so if these riskier investments pay off, the whole family is better for it.


Annuities are a form of insurance that guaranty a stream of income for a period of time. There are various annuities and having one as the underpinning of a financial plan can be appropriate in many circumstances. If an investor is uncomfortable with the volatility experienced in normal market investing, a guaranteed annuity can be just the ticket. However, when a senior citizen is sold an annuity late in life that “will pay an income stream for their lifetime” and then, on death, the policy expires with no remaining value – well, let us just say that many a legal case has been won based on this exact set of facts. 


If you think life insurance could be a good cornerstone of your financial picture, speak with your insurance agent or financial advisor. Always remember, however, that a commission is involved when a policy is sold. Your agent may be one of the most honorable people you know, but that is not true of all salespeople. Know what the policy will accomplish, what it guarantees and what it will cost. Then, run it by another advisor – your lawyer or tax advisor – for a second opinion.

Liza Horvath has over 30 years experience in the estate planning and trust fields and is the president of Monterey Trust Management, a financial and trust management company. This is not intended to be legal or tax advice. If you have a questions call (831)646-5262 or email liza@montereytrust.com










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