This is your captain speaking. To reach our destination of getting a rudimentary understanding of life insurance, we are going to be cruising at an altitude of 10,000 feet, so go ahead and strap your seat belts. As we take off, should the thought of our destination cause you to want to throw up, there are bags in front of your seat pocket. Once we get to a comfortable altitude, I assure you any negative thoughts and preconceived notions you had about our intended destination will have completely disappeared.
As a matter of fact, I can say with a great deal of confidence that once we reach our cruising altitude, you will be filled with excitement about our destination as you start to imagine all of the wonderful things you can do when you get there, and you realize the impact this trip will have on you for the rest of your life. As your captain, I can assure you that once we’ve arrived at our destination, you will know more about our destination than 99% of the population, which includes other captains – I mean financial advisors and insurance agents.
As a matter of fact, if another captain tells you about this destination and fails to share the things you learned on this trip then rest assured that one of two things have happened. Either that captain has no idea of what he’s talking about, or he hasn’t told you everything he knows.
Life Insurance Diagram
Once your advisor has helped you settle in on the amount of insurance you want to purchase, the next logical question would be cost. However, before going there, I just want you to know that irrespective of how much you want, for any level of desired coverage, there is a minimum and a maximum that you can pay for that coverage. Let’s assume the desired coverage amount is $1,000,000. Now, let’s start with the minimum. Who do you suppose is responsible for determining the minimum you could pay for $1M of coverage? If you guessed the insurance company, you’re right because they have actuaries on staff figure out that kind of stuff for you.
Now, for that same $1M in coverage, who do you think determines the maximum you could pay? If you said your wife, you’re almost right, as any smart man knows that as King of his castle, the King only makes the decisions that the Queen allows him to make (smile). All jokes aside though, the Internal Revenue Service, an arm of the government, determines the maximum you could pay for that $1M policy. I can hear you almost choking on that little fact.
Why Does The Government Care How Much Money You Put Into A Policy?
Now isn’t that an interesting question? So let’s think about this for a second. If the IRS even remotely cares about anything, what are they generally concerned about? If you said TAXES, you’re right. They care about taxes. And if the IRS cares so much about taxes that they are willing to limit how much money you can put into the policy, then that means it is probably good for who if you were putting money in there to that limit? That’s not a trick question either.
That means it must be good for YOU! That’s why they want to limit it, because they don’t want it to be too good for you because they want to collect their tax money. So, just keep that in mind as we further explore life insurance. For review, just remember that there is a benefit to YOU and it has something to do with taxes, and that is why the IRS is limiting how much you can put into the policy. Having a properly designed insurance policy is a crucial component of your financial plan. It’s just another way we help our clients with winning the money game and achieving financial independence.