Commodity
Will insurance ever be more than a “just in case” – one dimensional commodity? It is a tool that allows its users to leverage their money by placing it in a collective pool. If there is a large enough pool, then some predictions can be made with surprising accuracy. The most important predictions for the insurance carrier’s sake, are frequency and severity of future claims. They take their predictions, charge a fee, and provide their clientele coverage. That is how every insurance works but I’m curious if this is this where the function of insurance ends – a one dimensional, just in case coverage? Or is there another way to utilize the massive leverage that insurance affords? I would argue that certain insurances, such as car and home insurance, are one dimensional, and most likely will always be one dimensional. They are purchased with the hope to never use them – a coverage just in case something happens.
Now, what about life insurance? This is where it gets interesting. Life insurance can be one dimensional if used as a short-term solution. For instance, a 20-year life insurance policy to pay off the mortgage just in case the owner passes away prematurely. The owner may or may not survive the 20-year term, therefore it is a policy just in case – still one dimensional.
Permanent Life Insurance
But what happens when a permanent life insurance policy is used? Permanent life insurance is a catch all phrase for policies that are designed to last the insureds lifetime, and more importantly, pay the benefits one day. Everyone has a guaranteed mortality, so we’ve just identified a coverage that transcends the typical “just in case something happens” into a “when this happens one day” coverage.
Insurance provides massive leverage and when that leverage is coupled with a guaranteed outcome such as death, it creates a very interesting combination. It allows for families to build tax-free legacies to pass on to their heirs. It enables individuals to create cash-value that they can borrow against in the future, tax-free. What about the huge threat of long-term care costs on a retiree’s plan? Add a chronic-illness provision to a policy to help hedge that risk. What happens if the owner of the policy gets disabled and cannot contribute to the plan? If the waiver of premium for disability provision was added to the policy, then the insurance company would fund the premiums for the owner, and the plan would continue. A properly designed, forward thinking, permanent life insurance policy can be leveraged to hedge against many different risks of life. There are no cookie-cutter solutions for anything in the insurance industry and this holds true for life insurance as well. The key is to identify a goal, recognize potential risks, and design a plan accordingly.
Jesse Cunningham V is the owner of Mountain View Insurance Solutions located in Bel Air, Maryland. Weekly articles and videos are posted on our social medias outlets for the community to be educated, entertained, and empowered. Mountain View Insurance Solutions, 900 South Main Street #104, Bel Air MD 21014