Most people don’t recognize life insurance for the versatile financial tool that it is.
According to LIMRA, only 59 percent of Americans have life insurance — and about half are underinsured!
If you have a spouse, children, or aging parents who depend on you, life insurance should be part of your overall financial plan. One of your greatest assets is your ability to earn income and maintain a comfortable lifestyle for you and your loved ones. We insure our homes against fires and our cars against collisions—and we should also insure our future quality of life.
Life insurance is a tool to protect against catastrophic losses, pass along wealth to future generations, and offer added financial security.
Here are some answers to our commonly asked questions, including 12 unique benefits to life insurance.
Why do I need life insurance?
At its core, life insurance helps you create a measure of financial security for anyone you'll leave behind.
You pay premiums for the defined length of time and the insurance company promises to pay a death benefit to your beneficiary if you die while the policy is active.
Different folks will have different primary purposes for owning a life insurance policy. Here are some common reasons to purchase life insurance:
- Protecting family income.
- Leaving a legacy to children or grandchildren.
- Donating to a charity.
- Paying for funeral and burial expenses.
- Paying off mortgage or other large debt.
- Paying for a child’s college education.
- Planning for a special needs situation.
Term insurance works for most situations. While permanent life insurance covers you for life, it can be more expensive and may not be necessary if you aren’t interested in accumulating cash value.
How much life insurance coverage do I need?
The amount of coverage you’ll need will depend on a few things:
- How much money your family would need to fulfill immediate obligations (e.g., funeral costs and other final expenses)
- Lifestyle expenses (e.g., childcare, housekeeping, landscaping)
- Cash flow
- How many children you have, and their ages
- Years of income that you’ll need to cover
- Annual net income your survivors will need
- Any one-time expenses you wish to fund
A quick rule of thumb on life insurance is the amount that equals 10 to 15 times your annual income, and you should have it for a duration that gets you to retirement age.
What type of life insurance should I buy?
"Term” and “permanent” are the two main categories of life insurance, and they each have their advantages. Most people will do well with a plain vanilla term life insurance policy. Life insurance can play different roles at various stages in life, so you may wish to consider a mix of both types of protection.
Term insurance is the simplest, most affordable form of life insurance. You’ll pay premiums in exchange for death benefit coverage for the next 10, 20, or 30 years. If you make it past the term period, your policy expires, and you won’t get your premiums back.
Term insurance may be right for you if you’re looking for:
- Affordable coverage during your earning years
- Coverage for specific large expenses (e.g., your mortgage or your children’s education)
- Coverage for immediate obligations (e.g., medical expenses, funeral and estate-settling costs, outstanding debts)
Permanent insurance has two unique features: a "cash value" component, and the death benefit does not expire. You’ll need to pay premiums for the rest of your life, but after a certain amount of time, the cash value will offset some or all of the cost of your premiums.
Permanent insurance may be right for you if you’re looking for:
- Offsetting a decrease in pension income from an early death in retirement
- Legacy planning; transferring wealth across generations
- Estate planning; providing liquidity to an illiquid estate or covering taxes from a sizable estate
Premiums are fixed for the entire length of the policy, so as long as they are paid, they will not increase as you age.
Part of your premium goes toward covering the actual cost of insurance and part goes into the cash value savings component.
Your premiums and death benefit are flexible; you can apply some of your cash value to lower your premiums.
You also have the option to temporarily stop paying premiums and make up the difference later.
You may invest your cash value, at your own risk.
Everyone’s life insurance needs are different. Please contact us if you have any questions regarding how life insurance may be added to your holistic financial plan.
This information is not intended to be a substitute for specific individualized advice, and we suggest you discuss your specific situation with a Fiduciary Financial Advisor.
How long will I need the policy?
This may be the trickiest of the big questions. Of course, we don’t know when we’ll die, and that is a good reason to at least consider a permanent policy. While many people only consider term life insurance to replace lost salary if they die before retirement, coverage after your working years can be critical for your surviving family.
If you’re purchasing a life insurance policy to protect a specific interest—for instance, a business loan or mortgage—also consider the potential duration of that need as you review your options.
How does permanent life insurance help me build wealth?
A properly designed permanent life insurance policy can give you a wealth of benefits.
A good life insurance can be a great asset to you and your family.
When you eventually die, there will be a sum of tax-free money left behind to your beneficiaries. These death payouts go a long way toward promoting the tax-free, intergenerational transfer of wealth.
Your policy’s death benefit will help your loved ones buy time as they get back on their feet. It can cover:
- Final expenses
- Your mortgage and other large, co-signed debts
- College education for your children
- Long-term care for your parents
The stock market has wild swings. The cash value component of your permanent policy isn't subject to market losses, and may be right for you if you like guarantees and stability.
With any cash value life insurance policy, as the account grows, you can borrow against it or potentially withdraw money.
This will be interest-rate-driven based on the economy, but your account will move forward every year regardless of what the market does. This is compound tax-free growth.
You aren’t guaranteed dividends, and the amount of that dividend will vary based on the insurance company’s profit. However, many reputable life insurance companies have been in business for more than 100 years and they've paid out dividends every year.
Dividends are generally not taxed as income to you. Instead, they are considered a return of your premium regardless of whether you receive them in cash, use them to purchase additional coverage, use them to reduce future premiums, or leave them invested with the insurance company.
The most straightforward advantage? That hefty death benefit won’t be subject to income taxes or estate taxes. For instance, if you spend $250,000 for a $1 million life insurance policy, that initial premium payment comes out of the estate and won’t be taxed.
Additionally, the cash value component accumulates on a tax-deferred basis.
Finally, money loaned or taken from the cash value component is tax-free up to the cost basis, or the amount paid into the policy through premiums.
A properly structured permanent life insurance policy will have high cash value percentages, even in its first year, and they increase every year.
This is a huge benefit of whole life policies compared to 401(k)s and IRAs, which are subject to early withdrawal taxes and penalties.
You can leave your policy’s cash value alone if you wish, or borrow it back out and use it. The choice is yours.
As you continue to make premium payments and build up your policy’s cash value over time, your life insurance can provide a source of supplemental retirement income.
An added benefit is that some permanent insurance policies are eligible for tax-free dividends. Your dividends aren’t guaranteed, but when paid, they can be directed toward your policy’s cash value.
You can also take tax-free loans from the cash value of your permanent policy, giving you access to cash for any use or emergency you may have. Interest rates will generally be lower than personal, bank, or credit card loans.
Be sure to consult with your Fiduciary Financial Advisor to avoid the Modified Endowment Contract (MEC) classification, which has fewer tax perks.
With whole life insurance, your death benefit is guaranteed regardless of your future health. Guaranteed coverage becomes invaluable if you become seriously ill.
You can also add an "accelerated death benefit rider” to your policy, which will give you access to a large portion of your death benefit during your lifetime if you have a terminal or chronic illness. This can help pay for assisted living or long-term care expenses. Note that these accelerated benefits don’t provide an adequate substitute for long-term care or disability insurance, but are supplemental. Accelerated benefits are also often counted as income.
The federal gift and estate tax threshold is pretty high—$11.7 million per person in 2021 (or $23.16 million for a married couple)—but some states collect taxes on much smaller estates. By holding your life insurance in an irrevocable living trust, your beneficiaries can sidestep some serious tax obligations.
If you co-own a business, life insurance can facilitate the transfer of business ownership through funding a buy/sell agreement.
A family business can also benefit from a key person insurance policy. This is insurance on the main person in a small business, usually the owner, founder, or key employees. If that person unexpectedly dies, the company receives the insurance payoff. The business is able to use the proceeds to hire and train replacement employees, resolve outstanding business debts or keep up with day to day operating expenses.
Remember: To cover a key person, you need their express written consent as a condition of policy underwriting.
How much will my premiums cost?
The biggest factor on how much you'll pay for life insurance is your age and your health, because the cost depends on your mortality risk to the life insurance company. The younger you are, and the healthier you are, the lower those term life insurance rates are going to be.
That said, life insurance is a very saturated and competitive market. In almost all cases, there will be a life insurance company that can offer a policy to you, even if you’re an older applicant or have health conditions.
Because of that, to get the best rate, your best bet is to shop a full panel of life insurance companies. Every life insurance company is going to approach underwriting, meaning risk evaluation differently.
Work with an independent broker who can shop your profile around to all the top life insurance companies. That's the best way to make sure that you're getting the best price.
Need help finding life insurance?
We can help you find the right policy for your needs.
How can life insurance be used in my financial plan?
Here are three case studies showing how life insurance can be used as part of a broader wealth management plan.
Case Study #1:
Ron’s retirement account funds & life insurance
Retirement account funds—both IRAs and 401(k)s—can be taxed twice for wealthier individuals: First as income and, next, with an estate tax.
Assume Ron has $1,000,000 in his IRA. To avoid the tax bite from his IRA upon his death, James buys a second-to-die insurance policy with his $1,000,000. After Ron dies, his wife receives the $3 million tax-free benefit.
Case Study #2: James boosts death benefit by transferring current life insurance with cash surrender value policy
James had a 15-year-old second-to-die insurance policy worth $850,000 with a death benefit of $1.53 million.
His Financial Advisor recommended he do a tax-free insurance policy exchange.
The new policy had an increased death benefit of $3.48 million and there were no out-of-pocket charges.
Case Study #3: Kathryn's two-step annuity strategy
Kathryn buys an immediate joint-life annuity for $1,000,000. It pays $53,859 annually as long as Sarah and her husband are alive.
Next, Kathryn uses the annual payout to fund a $5.68 million second-to-die policy. In essence, Kathryn converted $600,000, the after-tax value of the initial $1,000,000, into $5.68 million.
Both the annuity and death benefits are guaranteed.
How do I find the best life insurance policy for me?
After thinking about life insurance and its wealth-preservation benefits, you probably have some questions of your own.
However, finding the best life insurance policy often means navigating a dizzying range of product features and pricing variables. To add to the confusion, every company is going to give you drastically different rates depending on how they assess your health and their own rating system.
The next step is to talk to a Fiduciary Financial Advisor who can help answer those additional questions and discuss your options.
Ready to find the right life insurance policy for you?
We’ll bring insurance quotes to you directly so you can get the most competitive rate.
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Life insurance can provide value across all income levels, and far beyond a simple death benefit.
If you’d like to learn more about the best life insurance policy for you, please fill out the form below and we'll get back to you shortly. We look forward to hearing from you.
DISCLAIMER: Advisory Services offered through Prosperity Financial Group, Inc., an Independent Registered Investment Advisor. Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Prosperity Financial Group, Inc. and Fortune Financial Services, Inc. are separate entities.