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Craft the Right Insurance Plan

My son loves to play Minecraft®. It’s one of his video games to which I object the least because it does encourage creativity. If only on a screen, players are still “building” and “creating.” But because it’s virtual (and a universe that has its own internal logic), the designers have also taken a lot of creative license with the relationship between inputs and outputs. For example, to make obsidian—a very useful material because it is, apparently, blast proof, one need only to collect lava and pour water on it. To grow wheat, you find grass blocks and harvest the seeds, make sure your “farmland” tile is within four tiles of water and your wheat grows over 24 hours. My point? While the creative processes incorporate some of the necessary elements, they are vastly simplified and would never work in the real world.

If anyone in the Minecraft universe wanted a life insurance contract—with all the Creepers, Skeletons, Endermen, Spiders and other threats you’d think they’d need it—they would probably simply take a book, a feather and an ink sack to craft it. The ingredients would be the same no matter what the circumstances. And a lot of steps, like creating content, would be immaterial. It only needs to look like a document. In the non-virtual world, though, it’s much more complicated.

Everyone who has children needs life insurance. It’s one of my soap-boxes as a financial planner. And in many cases, the crafting recipe is similar: buy several term policies in with decreasing death benefits and increasing term lengths. Term policies are relatively inexpensive. According to the contract, you pay premium for a certain number of years (the term). If you die during the term, the insurance pays out. Once the term is finished, you have no insurance. The layered structure is frequently appropriate for typically developing families. If a parent dies when the children are young, the remaining parent or caregiver needs a large-ish amount of money to see the children through to adulthood. As the children get older, they have less time until they “launch” as adults and, in most cases, the family has built up more assets, so the amount of insurance needed diminishes.

A financial planner will typically recommend that the family buy a large-ish policy one with a term that covers the period when the kids are very young—say until the youngest child is 10. The next policy, which might run until, say the youngest child is through high school, will have a smaller death benefit and then the final one, which will take the children through college and perhaps a few stabilizing years, has the smallest death benefit, assuming there are college savings plans and parental retirement assets in place. After that, unless one spouse is a much higher earner or one has a much shorter life expectancy, many families do not have a significant need for life insurance.

Having a child with a disability significantly alters a family’s life insurance requirements. If the child will grow to be an adult who will be anything short of totally self-sufficient, the parents will want to leave assets to the child to round out the adult child’s earnings and her/his government benefits. The child will always need financial assistance from her/his parent(s) no matter what the child’s age or the parent’s age when the parent dies. In other words, when you have a child with a disability, in many cases, you retain a need for life insurance into your old age. This requires a permanent life insurance policy, rather than one or more term policies. If you have a child with a disability, you need to discuss your situation with your financial planner and insurance agent and be sure that they are clear how long your need for insurance will last. Life insurance is not the only vehicle for accumulating and passing on wealth, but it has two rather unique characteristics when compared to other investment vehicles.

First, the return on your investment is very certain. When you buy life insurance, you have a legally enforceable contract. If you pay a certain amount in premiums, the life insurance company is legally obliged to pay you out a minimum death benefit that is defined down to the penny. Even in the highly unlikely event that the insurance company goes insolvent, there is a certain amount of protection available, for example through the Illinois Life and Health Guaranty Association in my home state. Of course, always check the financial health of an insurance company before purchasing by looking up the rating given it by at least two of the following: Moody’s, Standard & Poor’s, A.M. Best, Fitch or Kroll Bond Rating Agency.

Second, the money is always fully available at the exact moment when it is most needed, which for minor children or children with disabilities, is when the parent(s) die. Of course, any assets that can be inherited are are available at death. The difference is that if the death occurs prematurely, the assets may be way too small to take care of the dependent’s needs. Not so life insurance. If I buy a policy and pay my first premium and get hit by a bus the very next day, the full death benefits will be there for my family. And even if the death occurs when expected, the life insurance death benefit is a liquid asset. It is not a house or a painting or an alternative investment that might take time and effort to convert to cash.

Life insurance is a vital aspect of any family’s financial plan. For families with special needs, the importance of life insurance is greatly magnified. Make sure your financial planner or insurance agent understands the particulars of your special needs situation and has varied enough “crafting blocks” available to put together a program tailored for you. Find a mastercrafter, not a noob.

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