Life Insurance: Protection or Financial Plan

Life insurance with cute drawings

As bloggers, financial coaches, “influencers” and TikTok’ers have taken to the internet trying to convince investors that buying life insurance is financial planning, it has become more and more confusing for the average person to understand.  Buying life insurance alone is NOT comprehensive financial planning, it is one component of the financial planning process.  Simply addressing your life insurance needs is not going to help you work towards all of your goals.

Life insurance is a unique tool that provides much-needed protection to families. However, it’s essential to recognize that life insurance primarily serves as a protective shield for your loved ones and is not representative of a financial plan.

The Purpose of Life Insurance: Family Protection

At its core, life insurance is designed to provide financial support to your family in the event of your unexpected passing. It ensures that your loved ones are not burdened with overwhelming financial responsibilities, such as mortgages, debts, education expenses, and daily living costs if you’re no longer there to provide for them.

When you look at life insurance as family protection, its significance becomes clear. By paying regular premiums, you create a safety net that can offer stability to your family during a time of profound emotional and financial distress.

Differentiating Insurance from Financial Planning

Insurance is simply one area that needs to be addressed in the financial planning process.  It has some great uses for family protection as mentioned above, but if you are only addressing your insurance needs and thinking you have a financial plan you are sorely mistaken.

Financial planning is personal and includes the areas of Budgeting and Cash Flow Management, Savings and Emergency Fund, Investment Planning Retirement Planning, Tax Planning, Insurance Planning, Estate Planning, Debt Management, Education Funding, Risk Management, and Charitable Giving and Philanthropy which cannot all simply be addressed through the use of insurance.

Now that we have that clarified, let’s simply review two of the most common types of life insurance policies.

Term Life Insurance: Pure Protection

Term life insurance is a prime example of how life insurance can be utilized for family protection. With term life insurance, you purchase coverage for a specific period, such as 10, 20, or 30 years. If you pass away during the policy term, your beneficiaries receive a predetermined death benefit.

The advantage of term life insurance lies in its affordability and simplicity. You pay lower premiums for a specific level of coverage, allowing you to allocate funds to other areas that may be helpful to your overall financial plan. By utilizing term life insurance, you ensure that your family is protected during critical life stages without diverting significant funds away from other areas that may require attention too.

Permanent Life Insurance: A Dual Role

Permanent life insurance, such as whole life or universal life, has a dual role—providing protection and accumulating cash value. While these policies can be more expensive than term life insurance, they do offer a savings component that grows over time. However, it’s important to note that the growth of the cash value is generally slower compared to dedicated investment options.

The cash value within permanent life insurance can be accessed through policy loans or withdrawals, but doing so can reduce the death benefit and potentially have tax implications. For this reason, it’s crucial to view the cash value component as a supplementary feature rather than a primary investment vehicle.

When considering life insurance, keeping your family’s well-being at the forefront is essential. Life insurance ensures that your loved ones maintain their quality of life, meet financial obligations, and pursue their dreams even in your absence. Instead of fixating on potential investment returns, channel your efforts into securing an appropriate amount of coverage that suits your family’s needs and circumstances.

Life insurance should be embraced as a powerful tool for family protection, shielding your loved ones from the uncertainties of life and as one vital component of your family’s financial plan, not “the” financial plan. By recognizing its primary role as a safety net and choosing the right policy for your situation, you can create a foundation of financial security that allows your family to thrive even in challenging times. Remember, investments come and go, but the well-being of your family is a legacy that lasts a lifetime.

We would be happy to schedule a time to discuss how life insurance can be a part of your family’s financial plan.  Feel free to schedule a 30 Minute Zoom Meeting for us to discuss this and see how we may be a good fit for assisting you in getting a succession plan in place.

This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice. Investing involves risk, including possible loss of principal. No strategy assures success or protects against loss. To determine what may be appropriate for you, consult your financial advisor.

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