By: Edward Leach, MBA, CFP®, CEPA
Life insurance is critical to financial planning, yet many dental practice owners overlook its importance. Whether you're a solo practitioner or part of a group practice, having the right life insurance policy can protect your family, business, and financial legacy.
In this guide, we'll cover everything you need to know about life insurance, including the different types, how they work, and why they should not be treated as an investment.
Welcome to Our Financial Planning Series
Welcome back to our series of financial planning videos for dental practice owners.
This is Ed Leach, partner, wealth advisor, and Certified Financial Planner at Highland Financial Advisors.
In the following few videos, we will answer a simple but crucial question: Are you leaving your practice and family unprotected? We'll cover different types of insurance that are essential to incorporate into your personal and practice planning.
Why Do You Need Life Insurance?
Today, we're starting with the topic of life insurance and answering a few key questions:
Key Questions We'll Answer
Why do you need life insurance?
What are the key differences between term insurance and permanent insurance?
Why should life insurance not be used as an investment?
Understanding Survivorship Needs
Imagine you've worked hard to build your dental practice. You've also worked tirelessly to create a financial nest egg for your family. But have you considered what would happen if your income were suddenly cut off due to an unexpected event?
Life insurance ensures your loved ones have a financial safety net after you're gone. It helps replace lost earnings—not just for a few years but for the total wealth you would have built throughout your career.
Additionally, if you are a solo practice owner, your practice might lose value if you haven't planned for succession. If you are a partner in a practice, your absence could reduce the business's worth.
Life insurance for survivorship needs is simple: you need to answer two key questions—How much coverage do I need? For how long? Working with an advisor can help you determine these crucial factors.
Life Insurance for Practice Planning
If you have business partners, buy-sell life insurance is essential. Imagine you co-own a practice where each partner holds a 50% stake in a valuable asset. If one partner passes away, their share should be transferred to their heirs, but that doesn't mean the surviving partner wants to be in business with the deceased partner's spouse.
How Buy-Sell Life Insurance Works
Buy-sell life insurance is a simple solution. Each partner takes out a policy on the other, ensuring that if one passes away, the death benefit provides the necessary funds to buy out the deceased partner's share. This ensures:
The practice remains stable and operational.
The deceased partner's heirs receive fair compensation.
The surviving partner retains complete control of the business.
It's essential to align your buy-sell life insurance with your operating or shareholders' agreement to ensure smooth execution when needed.
Term Insurance vs. Permanent Insurance
What Is Term Life Insurance?
Term life insurance is straightforward:
It covers you for a set period (e.g., 10, 20, or 30 years).
You pay annual premiums.
Your heirs receive a tax-free death benefit if you pass away during the term.
It is cost-effective and ideal for meeting temporary financial obligations like mortgage payments, children's education, or buy-sell agreements.
How to Choose the Right Term Policy
For example:
If you're in your 20s or 30s with young children, a 20- or 30-year policy might be appropriate.
If you're in your 50s, a 10-year policy might suffice until retirement.
What Is Permanent Life Insurance?
Permanent life insurance lasts a lifetime—whether you live to age 100 or 120. It comes with a cash value component that builds over time, but it is significantly more expensive than term insurance because the insurance company guarantees a payout.
Understanding the Cash Value Component
While it is often marketed as a tax-free investment, the reality is:
You're using a forced savings vehicle to self-insure a death benefit.
Cash value accumulation is slow and comes with high administrative costs.
Liquidity is limited—you cannot easily withdraw funds without surrendering the policy or taking a loan (which incurs interest).
Should You Use Life Insurance as an Investment?
Traditionally, permanent life insurance was seen as an investment alternative. However, modern financial strategies offer better options, such as low-cost ETFs, stocks, and bonds.
Understanding Policy Projections
When reviewing permanent policies, you'll see two columns in illustrations:
Guaranteed returns – the minimum the insurance company guarantees.
Non-guaranteed returns – projections that often appear more optimistic than reality.
Why Permanent Life Insurance Is Not an Ideal Investment
Before investing in permanent insurance, ask yourself:
Why pay high administrative fees?
Why lock my money in an insurance product with limited liquidity?
Permanent life insurance can be helpful in estate planning, particularly for high-net-worth individuals facing estate taxes. However, for most people, term insurance combined with proper investment strategies is best.
The Best Approach: Laddering Term Insurance
At Highland Financial Advisors, we recommend laddering term policies for cost-effective coverage. Instead of a single long-term policy, consider multiple policies with different durations, such as:
A 10-year policy for short-term needs (e.g., paying off business loans).
A 20-year policy for medium-term needs (e.g., mortgage coverage).
·A 30-year policy for long-term needs (e.g., supporting children through college).
This strategy maximizes coverage when needed most and prevents you from overpaying for insurance in later years.
Final Thoughts
In this video, we answered three key questions:
Why do you need life insurance?
What is the difference between term and permanent insurance?
Why is life insurance not a great investment vehicle?
At Highland Financial Advisors, we help clients determine the right amount and duration of life insurance to protect their families and businesses. We aim to ensure affordable, adequate coverage that aligns with your long-term financial plan.
Subscribe to our channel to stay updated. In our next video, we'll cover another essential topic: disability insurance.
Thank you for watching, and see you next time!
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
Ed Leach, CFP®, MBA, is a Partner and Wealth Advisor at HIGHLAND Financial Advisors, LLC in Wayne, NJ, and works directly with clients advising them on their financial planning and investments. Ed’s work focuses on the unique needs of business owners, helping them extract value from their businesses while creating efficiencies in their business and personal financial plans. He is also a member of NAPFA, which is dedicated to serving fee-only advisors.