As a financial advisor, my job is to help my clients think long-term about their goals and the type of legacy they want to leave behind. This means that eventually topics like aging and death become part of our discussion.
I understand it’s difficult to face our own mortality, and this is often the most challenging part of creating a thorough financial plan. However, knowing your loved ones are taken care of if something happens to you makes it worth going through the “tough stuff.”
While financial planning offers many ways to take care of your family for generations to come, there’s one avenue that offers more benefits than people may realize: life insurance.
The best-known purpose of life insurance is to provide income replacement to your loved ones if you pass away, so they can continue paying the bills and supporting their lifestyle. In this article, I want to highlight five additional ways you can use life insurance as part of your financial plan.
1. Contribute to Cash Value Life Insurance
One way to use life insurance is to contribute to a cash value life insurance policy. In addition to providing funds for your loved ones if you pass away, many life insurance policies feature a savings component that you can use as part of a tax diversification strategy.
If you reach the maximum yearly contribution for a traditional or Roth IRA, or are over the annual income limit, which prohibits you from making IRA contributions and still having cash on hand, you can invest it into the of your life insurance policy that can be withdrawn as tax-free income while you are still alive. The ratio of cash savings to death benefit will depend on your policy, but this is one strategy to consider for getting the most out of your hard-earned dollars in retirement.
In addition, life insurance can be structured so that it’s outside of clients’ estates, producing not only an income tax–free benefit to their heirs, but also one that is not subject to estate tax, regardless of the value of their estate when they die. In other words, itis a truly tax-free benefit.
2. Pay Estate Taxes
Another way to use life insurance is to pay outstanding taxes on your estate in the event of your death. For example, let’s say your family is one of many farmers in the region that owns non-liquid assets like land or equipment. If you have unpaid estate taxes upon your passing, the IRS may force your heirs to liquidate assets to pay the debt. However, life insurance proceeds can be used to cover your estate taxes and protect your family’s wealth.
3. Create a Survivorship Policy
Sometimes referred to as “second-to-die” life insurance, a survivorship life insurance policy is written for two people instead of one – typically a husband and wife. Since the risk is spread over two life expectancies, the premium cost may be significantly less. With this policy, the death benefit is paid to the beneficiaries after both people pass away. Once the second person dies, the funds can be used to pay estate taxes, make lifetime donations to charitable organizations, support a child with special needs, and more.
4. Equalize an Estate
When you pass, your assets will be distributed among your beneficiaries as laid out in your will. You can use life insurance to equalize your estate, which is the process of distributing a balanced amount of assets to each heir. For example, if you are a business owner who is leaving the company to one of your three children, your life insurance funds can go toward your other two children in equivalent value. This will help prevent money-related conflicts between family members and give you peace of mind that everyone is getting a fair share.
5. Fund Long-Term Care
As you age, you may eventually need long-term care offered through a senior living community or nursing home. Costs for long-term care are typically paid through a combination of Medicare, Medicaid, long-term care insurance, and lifesavings, depending on your personal situation and qualifications for these programs.
However, there is another type of insurance called hybrid-life insurance that allows you to use up to 91% of the death benefit to fund skilled nursing care. Even though this payout may be taxable and would decrease the death benefit to your beneficiaries, it is an option to explore if you want to alleviate long-term care costs during your golden years.
How to Choose the Best Policy for You
There are many different policies to explore to round out your financial plan and provide financial security for your loved ones if you pass away unexpectedly. The best policy for your personal situation will depend on your age, pre-existing health conditions, habits, and other factors that will drive the cost of your monthly premium.
Our team is well-versed in all areas of life insurance to help identify policies that align with your goals and offer guidance every step of the way. Reach out today to start exploring your options.
Together, we can work to keep you on-track towards your financial goals.
Request a consultation with me to learn more.
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