Life insurance is mainly associated with financial protection for loved ones in the event of the death of the insured. Many may not realize, however, that life insurance can also play a major role in providing financial benefits and opportunities during one’s lifetime. This article explores the different uses of life insurance beyond its traditional purpose, highlighting its value as a financial tool with “living benefits” for individuals, families, and businesses.
Wealth Accumulation: Life insurance can serve as an effective way for people to generate wealth. Certain types of life insurance policies, such as whole life or universal life policies, provide cash value that grows over time. This cash value can be used during the policyholder’s lifetime by withdrawing the cash or taking a policy loan. In fact, many life insurance policies do not require repayment of a policy loan (though the proceeds may sometimes be taxed as ordinary income, and they may also affect the eventual death benefit of the policy). By using these options individuals can grow and utilize funds for different purposes, such as funding an education, starting a business, or helping with additional funds in retirement.
Estate Planning: Life insurance plays an important role in estate planning, especially for individuals with substantial assets. It provides a means to preserve wealth and ensure the smooth transfer to future generations. Remember, life insurance death benefits are generally exempt from income tax and can help cover estate taxes, debts, and other expenses, making sure that the intended beneficiaries receive their inheritance without delay. They also typically pass to the beneficiary(ies) of the policy without the delay of probate processes. How one owns an insurance policy (in one’s own name or through a trust) can impact the taxation of proceeds. In short, it is typically advisable for those with large estates to vest ownership of the policy in a properly designed trust.
Business Continuity: For business owners, life insurance can be instrumental in ensuring the continuity and stability of their business. Key person insurance protects a business against the financial impact of losing a key person, such as an owner or other important employee. For partnerships, a life insurance policy can be used to fund a buy-sell agreement in the event of the death of one of the partners. In the event of an untimely death, the policy proceeds can also be used to cover expenses, recruit and train replacements, or provide a monetary cushion during a transitional period.
Supplemental Retirement Income: Life insurance can add to retirement income and increase financial security during those important “senior years”. By selecting policies with cash value growth potential, individuals can grow funds over time that can be withdrawn or borrowed against during retirement. These funds can be used to cover living expenses, and healthcare costs, or provide an additional source of income when other retirement savings may be insufficient.
Charitable Giving: Most of us have charitable causes that we care about. Life insurance offers a unique opportunity for those who are charitably inclined to create a legacy through giving. By naming a charitable organization as a beneficiary of a life insurance policy, policyholders can make sure their charitable goals are met after they pass. Furthermore, the premiums paid towards the policy may qualify for tax deductions, making it an attractive option for those passionate about supporting causes they valued during their lifetime.
Income Protection: Life insurance can provide income protection during one’s working years, providing a safety net in the event of disability or critical illness. This is especially important for young families just starting out who want to make sure the family has sufficient resources for those moments in life. In addition to the cash withdrawal and policy loan options discussed earlier, some life insurance policies offer optional riders, such as disability income or critical illness riders, that provide additional coverage in case of untimely death or disability. These riders can offer financial support, covering medical expenses, mortgage payments, and daily living costs while the policyholder is unable to work.
While life insurance is commonly associated with after-death financial planning and protection, its benefits extend beyond the policyholder’s passing. By leveraging the cash value part of the policy, using different policy types, and exploring additional riders, policyholders can use life insurance as a versatile financial tool throughout their lifetime. From wealth accumulation to estate planning, business continuity, and charitable giving, life insurance offers individuals and families the opportunity to enhance their financial security, achieve their goals, and leave a lasting legacy. As always, it is critical that you consult with a financial advisor, insurance professional and/or your tax advisor to understand the specific options and policies available. This will help ensure that your policies are effectively integrated into your comprehensive financial plan.