This concept is a simple way to show the relationship between taking care of your responsibilities and building and preserving your wealth. The Wealth Flow Formula combines two concepts that address your changing long-term financial needs.
THE THEORY OF DECREASING RESPONSIBILITY
In the early years, since you haven’t had the time to accumulate wealth, you must rent a substitute form of wealth called Term Life Insurance. With responsibilities such as young children, high debt, a mortgage and college to pay for, a loss of income from death or a Chronic, Critical or Terminal Illness would be devastating to a family. Even a non-working spouse needs to be protected in order to support a loved one and to ensure financial stability in the family.
THE LAW OF BUILDING EQUITY
Over the years as your financial needs change, you are beginning to accumulate wealth with the Law of Building Equity and your financial responsibilities are decreasing as your children become grown, your debt is reduced, and your mortgage is paid or nearly- paid. In the later years, as you have accumulated wealth, you need to protect against living too long, income taxes, lawsuits, garnishments, liens, judgements and estate taxes. To solve this need, Permanent Life Insurance is needed. The permanent life insurance protects your assets. Furthermore, as your Term Life Insurance expires, the Permanent Insurance will be there to not only provide you with a potential tax-free income stream, but you may access the death benefit while you are alive for a qualifying Chronic, Critical or Terminal Illness if your policy contains Accelerated Benefit Riders (also known as Living Benefits).
As you can see, there is always a need for life insurance, however the purpose of how the life insurance is used changes over time. While the idea of “self-insurance” seems like it makes sense, when you break it down to the nuts and bolts as to why life insurance is used in the later years to protect wealth, the evidence is clear. If you had $1,000,000 of wealth, wouldn’t you want to protect it? Would you rather pay a smaller cost of insurance to an insurance company or a larger income and/or estate tax to the IRS? Life insurance gives you the power of leverage and the ability to mitigate your risk by shifting the risk of economic loss over to an insurance company. For the cost of a monthly premium, you can also protect your income from potential estate tax, probate court and income tax. Self-insurance cannot provide these benefits.