The hidden gem of financial planning
What comes to mind when you think of Life Insurance? If you’re like many people, you consider it a way to provide for your loved ones after you die. And if you purchase a term life insurance policy, the death benefit is all there is. But when you invest in a permanent life insurance product, you are funding a wealth of possibilities for your future.
First, a couple of definitions. It’s important to understand the difference between term and permanent life insurance. Term insurance, as the name implies, covers you for a specific period of time that you choose. You make the scheduled payments and if the term ends before your death, the policy ceases to exist and there is no remaining value. Permanent life insurance is different. As long as you pay the premiums, the policy remains in force. Over time, it accumulates cash value. As that value grows, you are able to tap the funds in a variety of ways while you are still alive.
Here are 5 examples of ways you can use permanent life insurance to fund the opportunities and obstacles of life:
- Borrow money when you need it. Once your permanent life insurance policy has accrued a sufficient cash value, you can borrow against it and use the cash for any need that arises. Help pay your child’s college tuition without filling out complicated financial aid forms, start a business without applying for a loan, or take time away from your job to care for an elderly parent. These are just a few things you can do with permanent life insurance.
What you should know: Any amount you do not pay back will reduce the death benefit; and there may also be tax ramifications.
- Pay for long term care. Adding a long-term care rider to your permanent life insurance policy allows you to accelerate the death benefit to pay for the costs associated with long-term care, should you become disabled or chronically ill. When you die, any remaining benefit is paid out to your heirs.
What you should know: Plans vary in what types of care they will cover and how easily you can access the benefits.
- Reduce tax liabilities. The returns made inside a permanent life insurance policy are not subject to taxes, and many companies provide a minimum guaranteed return regardless of how the market performs. Permanent life insurance can also be used to reduce estate taxes and to cover tax obligations after you die, so your heirs do not have to use their personal funds or liquidate other assets.
What you should know: High-earners may be in their highest tax bracket in the first few years after retirement. The cash value from your life insurance can cover your living expenses so you can delay tapping into 401(K) or other taxable funds.
- Protect your business. If you own a business, permanent life insurance can help you in a variety of ways. Key Person life insurance provides funds your organization in the event you or another important person dies or leaves the company unexpectedly. Permanent life insurance is also a smart way to fund a buy-sell agreement. Funds are immediately available, and the overall premium costs will generally be far less than the cost of loan.
What you should know: Your heirs may need to agree to certain provisions, and certain tax ramifications may apply.
- Achieve your philanthropic goals. You can significantly boost your impact on your favorite causes through life insurance, by designating a charity or other organization as your beneficiary. When structured properly, permanent life insurance can enhance your estate planning and wealth management goals, allowing you to create a lasting legacy.
What you should know: When a charity is named as beneficiary of a life insurance policy, the money they receive from the death benefit is tax free.
“I often say life insurance the hidden gem of financial planning tools,” says Dave Binsfeld, Vice President of General Southwest Insurance. “Most people don’t realize all the ways it can be used to generate investment income without the tax issues of an IRA or other retirement savings.”
To learn more about the creative ways permanent life insurance can further your financial goals, contact your GSW insurance advisor, or your financial planner.
If wealth management and philanthropic giving are your main objectives, consider consulting with a Chartered Advisor in Philanthropy (CAP®). Binsfeld earned the CAP designation in 2017. “I get a lot of personal satisfaction,” he says, “In helping people provide security for themselves, their families, and also helping them give back to the community. Permanent life insurance really is a win-win type of investment.”
This article is not intended to be exhaustive nor should any discussions or opinions be construed as legal advice. Examples included in this document are for information purposes only; for specific coverage details consult your insurance policy. Contact legal counsel or an insurance professional for appropriate advice.