Be a savvy insurance shopper.

• Author: Head, Wallace L.
• Position: Personal Financial Planning

Mark Jones (not his real name) is a smart businessman who parlayed a small family business into a personal net worth of $50 million. He plans to minimize taxes by leaving most of his estate to a charitable trust, and to keep his children comfortable with $30 million of life insurance he acquired within the last two years which he will fund with $400,000 in annual premiums.

But Mark has just discovered he has a problem, a problem you may share even if your personal net worth is $500,000, not $50 million. He has just learned that his universal-life policies are designed to run out of cash by his 86th birthday. So, if he lives that long and wants to keep his policies in force, he will have to pay astronomical premiums. If he won't--or can't--pay those premiums, the policies will lapse, his children's inheritance will diminish, and his $400,00 premiums will have produced no lasting benefit. But if he cancels and replaces the insurance policies now, he'll face stiff surrender charges and, as insurance companies scramble to make up in premiums what they once got in investment earnings, even higher premiums.

How could this happen? Mark thought he was following a well-designed, conservative strategy. He had no idea that he was betting he would die before the policies self-destructed. His advisors did not advise him well.

Unfortunately, Mark is like many successful executives and entrepreneurs: concerned enough about financial planning to buy a major insurance program, but not knowledgeable enough to make certain that what they are buying meets their needs and risk tolerance.

Mark's story illustrates some of the pitfalls of financial planning with life insurance. Used correctly, life insurance can provide a sturdy and stable financial structure; but when it is not used correctly, it can do considerable damage.

We'd like to offer some tips on how to shop for insurance so you don't find yourself in a position in which, like Mark, what you bought is not what you think you bought.

KNOW YOUR GOALS

Obviously, the principal purpose of life insurance is to replace the economic contribution of an individual who dies prematurely. But, thanks to its highly favorable tax treatment, it also has important uses for financial and estate planning. Unless you have been guilty of extremely poor planning, your beneficiaries can receive a death benefit free of income tax. And the cash value of an insurance policy grows tax-deferred and usually can be tapped through policy loans without any tax consequence--unless the policy is classified as a modified endowment contract. More on that later.

THE COMPANY IS KEY

When you buy insurance, you're buying a set of promises. But even some pretty sophisticated buyers overlook the fact that those promises are only as good as the company making them.

Obviously an insurer's ability to pay claims when they are due is an essential part of...