Take a moment to imagine what would happen if you were involved in a fatal accident and died today.
Would your loved ones have enough money to get through the next few months?
What about the next three years? The next five years?
Would they have to deal with the possibility of losing their home?
Would your children still have the opportunity to attend college?
What if you became one of the 15 percent of American men and 9 percent of American women who die before age 60?
When your loved ones depend on your financial support for their livelihood, it becomes patently clear why life insurance is a must. Life insurance provides an affordable way to financially protect your family.
Through life insurance, you can:
- Provide for your spouse with extra tax-free money.
- Make sure your kids’ and aging parents’ needs are taken care of with tax-free money.
- Put the proper plans in place so your business doesn’t fall apart.
- Leave a legacy for charity or for your foundation.
- Shield your family from unintentional financial burdens.
Dying suddenly—in an accident, by an unexpected illness, or even in a natural stroke of bad luck—can happen at any time. The mortgage, bills, and daily costs of living don’t stop after you’re gone. Arranging ahead of time with a life insurance strategy can make things easier for those whom you leave behind.
Is Life Insurance Worth It?
In short: yes, life insurance is worth it. We all have a natural desire to retain our hard-earned wealth. Life insurance gives you a way to maximize your after-tax dollars so you’re better able to pass along your hard-earned assets to your children.
A policy’s death benefit gives your loved ones the ability to replace the loss of your income, repay debts that you’ve left behind, pay unpaid medical bills or taxes, and so much more.
The big question is: Is it worth it to pay those life insurance premiums? After all, it’s an uncomfortable situation to contemplate. Who wants to think about spending their hard-earned money on something that you hope will never happen?
Think about it this way. Life insurance is a valuable tool for managing your risk—which we’re all subject to—of dying prematurely.
If you have a spouse, children, or aging parents, just imagine how their lives would change if you pass away and leave them without your income—on top of other “final bills.” From this perspective, life insurance becomes a selfless investment to help buffer against a financial crisis when you pass away.
Is Life Insurance a Good Investment?
The value of life insurance goes far beyond the death benefit. Here are four very good reasons why life insurance is a good investment:
- Life insurance provides a means to protect your family and loved ones. You can also leave an inheritance through your life insurance.
- Life insurance policies aren’t counted as part of your estate and are shielded from federal taxes. It’s also legal to own several whole life insurance policies.
- Life insurance is a useful financial tool for business owners. This is especially important if you’re a key person or part of a business partnership.
- Life insurance is an asset. Policies are salable for their cash value.
Protect Your Loved Ones
Too often, when the primary income earner passes, the remaining family members are forced to make tough decisions—and to do so quickly. However, it’s doubly difficult to make rushed decisions during such a vulnerable time. It’s not likely that your family will be in the right state to make sound choices while grieving.
Death shouldn’t mean debt. Life insurance lets you buy your family some time to adjust, rather than having to move to a downsized home or find a new job right away. Your family will be protected from financial hardship. With a life insurance policy, you’ll help your surviving dependents maintain their quality of life; the benefits can be used to cover estate taxes, housing payments, personal loans, college costs, and ongoing living expenses.
And even if you don’t have any other assets to pass onto your children, you can ensure an inheritance by naming your kids as beneficiaries to your life insurance policy. It’s a wonderful gift to set your kids up for a solid financial future and provide some financial uplift.
Tax Laws Favor Insurance
You don’t want your death to create a financial thicket for your loved ones. With life insurance, you can transfer wealth in a tax-smart way. Here are some examples in which life insurance proceeds are protected from taxes:
- Growth cash value. Permanent life insurance policies are designed to increase in value through investments. That growth isn’t counted as income and won’t be subject to taxation.
- Lump-sum payments. If you decide to surrender your permanent life insurance policy and the lump-sum payment is less than the money you put into the policy, your payout is also exempt from taxation.
- Investment dividends. Mutual insurance companies may return money to you in the form of investment dividends. The amounts aren’t taxed until they exceed what you’ve paid out in premiums.
- Taking care of your spouse. Life insurance payments to a spouse generally aren’t subject to federal income taxes. Your loved ones will receive your guaranteed life insurance payout without the major tax bite. That’s a guaranteed return on your premium payment.
Protect Your Family Business
Small businesses are the backbone of the American economy. There are over 30 million small businesses in the U.S. alone! If you own one of them, there’s a very good chance that you need life insurance.
Life insurance isn’t just designed to protect your family—it’s also a solid strategy for protecting your business from crippling financial loss, liabilities, and instability. Having a life insurance policy is a key component for planning an orderly, economical transition.
- Buy some time while preparing for the next steps. What would happen to your business if you were to die unexpectedly? Could your business move forward without a hiccup? Life insurance benefits provide relief in the form of instant liquidity so that your business can meet ongoing financial demands.
- Collateral coverage. If you’ve taken out loans to grow your business and used family assets as collateral, those loans could become due upon your death. Life insurance helps protect those family assets until your loved ones can get back on their feet.
- Make up for lack of employee benefits. As a business owner, you may not have the benefits that come with being an employee, like company-sponsored retirement accounts, group life insurance, or disability insurance. Life insurance helps you cover those bases.
- Key person insurance policy. Lenders will generally require key person life insurance on anyone who is a vital part of your company. Having this policy can help protect your firm from going under in the event of your untimely death by paying out a tax-free death benefit to the company.
- Buy/sell agreements. Life insurance can fund a buy/sell agreement, also known as a business will. With a buy/sell agreement, you can help protect you and your company from the unexpected transfer of ownership. A buy/sell agreement defines the specifics of who will get what in terms of shares of the business, and having one can help gain favor when dealing with creditors.
As you can see, life insurance provides an invaluable financial safety net for business owners. The most salient benefit is securing the necessary short-term cash to keep operations running until things settle after your death. As a bonus, you can deduct your premiums as a business expense.
Life Insurance as an Asset
Permanent life insurance is a financial instrument that can hedge against market risk.
- Cash value as an asset. One major perk is the cash-value component, which is designed to increase in value over time. That makes it a financial asset. Assets have clear financial benefits, like securing loans to build further wealth. You can build up a substantial nest egg over time as you pay your premiums—with tax and creditor protection, even in case of bankruptcy.
- Cash surrender value. If you surrender your policy, your cash value is tax-free up to your cost basis, or the sum of all your premium payments. Any amount beyond the basis is considered a gain and subject to ordinary income taxes.
- Access cash value on a tax-advantaged basis. Once your cash value has grown, if other options aren’t available, you can access needed funds through your policy. Money borrowed isn’t taxable so long as the amount is below your cost basis. You can use it to pay for college, a house, or even your premium payments.
- Tax-free dividends. When properly structured, permanent life insurance can offer dividends, similar to traditional investment dividends. These dividends are tax-free because dividends are considered a return of policy premiums.
Types of Life Insurance
Life insurance can be divided into two major coverage categories: term and permanent.
Term vs. Permanent Life Insurance
Length of coverage
Term life insurance covers you for the term length, which is generally 10, 20, or 30 years.
Permanent life insurance covers you for the rest of your life, no matter if you live to age 75 or age 120.
What to consider
With term life insurance, you’ll factor in your expected future expenses to anticipate how long you’ll need coverage. You can opt to be insured until your mortgage is paid off, until your kids graduate from college, or until you retire. If you die before your coverage term ends, your beneficiaries will receive the death benefit.
With permanent life insurance, you’ll receive lifetime coverage and a cash accumulation feature. You can access your policy’s cash value to cover expenses like your children’s college costs or retirement costs.
Term life insurance is simpler, more affordable, and doesn’t always require an insurance agent.
Permanent life insurance is significantly more expensive than term. The additional bells and whistles, like cash value and tax-free dividends, come at a higher price. Annual premiums are up to five times more expensive for the same dollar amount of coverage.
Deciding what's right for you
When choosing a policy, it comes down to your personal preferences and financial situation.
Term life insurance might be right for you if:
- You need an affordable way to protect your family.
- You’re looking for coverage to help your spouse pay for day-to-day expenses if you were no longer around.
- You want to be covered until your children are financially independent.
- You require a policy to help pay specific co-signed debts, like a mortgage or student loans.
- You anticipate that you’ll have substantial retirement savings.
Permanent life insurance might be the better choice if:
- Life insurance is part of your long-term financial strategy.
- You’re looking for lifetime coverage.
- The cash value component is helpful for your future needs.
- You don’t mind paying higher monthly premiums for extra benefits.
Let’s take a closer look at the details of term life and whole life insurance.
Term Life Insurance
Term life insurance, also known as pure life insurance, guarantees a payout upon your death within a specified term. Your term life insurance premiums are based on your age, health status, and life expectancy.
- Term length. Terms generally range from 10 to 30 years; choose a term length that matches the timeframe of your financial responsibilities. For example, you can opt for coverage until your children are financially independent, or until your business loans are paid off.
- Affordability. Term life insurance is, by far, the most affordable form of life insurance. It’s worth it if you want financial security for your loved ones at a budget-friendly price.
- Drawbacks. Term life policies don’t have a cash value or savings component. Coverage is limited to your chosen term, and once coverage ends, you don’t get back the premiums paid. And, if you choose to buy another term life plan, your premiums may go up.
Permanent Life Insurance
Permanent Life insurance gives you lifetime coverage and cash value benefits. You have a few options for Permanent Life insurance depending on your individual preferences and needs.
- Whole Life insurance. Whole Life insurance policies offer lifelong protection and a cash value component that slowly accumulates.
- Universal Life insurance. Universal Life policies give you a little more flexibility with both your premiums and your death benefit. You can easily access your cash value.
- Variable Life insurance. Variable Life policies let you put the cash value into an investment account managed by the insurance company. Your minimum death benefit is still guaranteed.
- Variable Universal Life insurance. This policy combines Variable Life and Universal Life insurance by letting you send in premium payments anytime, as long as you’re within the minimum and maximum rules. Your underlying cash value is subject to how well your selected investments perform.
Whole Life Insurance
With Whole Life insurance, you’ll have lifelong coverage as long as you continue paying your premiums, regardless of how long you may live.
A Whole Life policy offers consistent, level premiums that stay the same for the life of the policy. Whole Life also features guaranteed cash value accumulation, giving you added financial flexibility in case of an emergency.
Universal Life (UL) Insurance
An attractive feature of UL policies is the flexible premium option. Your death benefit can be raised or reduced, thus adjusting the face value of your coverage and changing your premiums accordingly—without surrendering your policy.
UL premiums tend to be lower, similar to those of term insurance. Premiums include two components:
- Cost of insurance (COI) amount. This is your minimum premium payment required to keep your policy active. It includes several items bundled together into one payment: the charges for mortality, policy administration, and other directly associated expenses to keeping the policy in force. The COI amount is determined by your age, insurability, and the insured risk amount.
- Cash value. Any premiums collected over the cost of COI will accumulate within the cash value portion of your policy. As you grow older, your COI will increase. If sufficient, the accumulated cash value will cover the uptick in COI.
Just like a Whole Life policy, a UL policy can also accumulate cash value. Your UL policy’s cash value earns interest based on the current market or minimum interest rate, whichever is greater.
As your cash value accumulates, you can access a portion of the cash value without affecting your guaranteed death benefit. You’ll be able to borrow against the cash value without tax calculations—however, interest will be calculated on the loan amount, and there will be a cash surrender fee.
Variable Life Insurance
Variable life insurance is a type of permanent life insurance policy with an investment component. As its name indicates, your policy’s cash value will see varying results according to investment performance. Exposure to market fluctuations can generate significant returns, but may also lead to substantial losses.
Variable life insurance policies are appealing because of the opportunity to generate tax-deferred profits. You’ll have a cash value account that’s invested in a number of subaccounts—similar to mutual funds—and has the potential to grow and drop with the securities in the subaccounts. Many policies offer a wide array of investment options to match your risk tolerance and goals, ranging from a conservative approach to an aggressive strategy.
Because of their investment risks, variable life insurance policies are treated as securities contracts. Like any investment, you have to manage risk and reward, factor in expenses, and stay on top of asset allocation to maximize investment performance. If you aren’t prepared to do this yourself, make sure you have a Fiduciary Advisor who will.
Premiums aren’t fixed as with Term or Whole Life insurance policies. As long as you stay within certain limits, you can adjust your premium payments based on your needs and investment goals.
You may access your policy’s cash value with a tax-free loan. However, unpaid loans, including principal and interest, will reduce your policy’s death benefit. And if you opt for a partial or full surrender of your policy, any interest or earnings are taxable at the time of distribution.
And finally, it’s important to understand that the death benefit is linked to the performance of the subaccount funds. The risk of Variable life insurance is that stock markets can be volatile—the cash value of your policy can go up, but can also go down. A Variable policy does offer a guaranteed death benefit even if your invested assets devalue significantly.
Variable Universal Life (VUL) Insurance
VUL policies combine the best of Variable and Universal Life characteristics. Like Variable life insurance, VUL policies allow you to invest your policy’s cash value on a tax-free basis. Like Universal life insurance, your premium is flexible. Your investment returns are guaranteed by a minimum floor and maximum cap.
Just like with Variable life insurance, VUL has investment subaccounts, structured like mutual funds, that allow for the investment of your policy’s cash component. These subaccounts are legally treated as securities, and it’s worth seeking assistance from a Fiduciary Advisor.
Some policies restrict the number of transfers into and out of the funds. If you’ve exceeded that annual limit, and your subaccounts have performed poorly, you may need to pay a higher premium to prevent the policy from lapsing.
We Can Help
Life insurance can be an uncomfortable topic to discuss. However, it’s an important and useful product that’s worth reviewing if you’d like to tie up some loose ends after you’re gone. The last thing we want is to leave a financial burden behind for our children and loved ones. With a life insurance policy, you can give your family a parting gift of financial stability.
The reality is that life insurance can be an effective and vital tool for wealth management and wealth transfer. By failing to incorporate life insurance into your wealth strategy, you may end up inadvertently creating a financial crisis when you pass away.
Policies are designed to protect your family and your business from the high costs associated with your passing. Death benefits can provide survivor income, help pay off debt, or otherwise generate much-needed liquidity upon an unexpected death. And if you’re a business owner, policies on you and your partners can supply the necessary cash to keep the business intact.
Our Fiduciary Advisors can help you select the life insurance plan that’s right for your specific situation. 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.