Use the benefits of life insurance to help support you throughout your lifetime and beyond.
Life insurance is known for the financial safety net it can provide your loved ones should you pass away. However, it can provide additional benefits when used strategically. Specifically, permanent life insurance can help support your broader financial goals, providing a way to build wealth, leave a legacy, manage taxes and help cover the cost of long-term care.
We can help you decide how life insurance may help support your family, unique needs and overall financial goals. Here are six advantages of life insurance, as well as potential costs and other financial considerations to account for.
In this article:
1. Protect your loved ones2. Build wealth3. Provide a flexible source of cash4. Help pay for long-term care5. Leave a legacy6. Amplify support for the causes you care about7. Questions to discuss with us
Permanent vs. term life insurance
Life insurance comes in various forms, and each has their own unique benefits. As you review the advantages listed below, know that there are two main policy types: term life insurance and permanent life insurance. A term policy offers protection for a specific time period, while a permanent policy offers coverage for the long term.
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1. Protect your loved ones
Life insurance provides money to people you care for when you die. Regardless of your policy type, your beneficiaries can use the generally income tax-free death benefit for final expenses, to pay off a mortgage, finance a child’s education or ensure they can maintain their lifestyle. Having adequate life insurance throughout your life is essential to help prepare for the unexpected, but it’s particularly important if your income is key to your family’s wellbeing, and if you’re in your core earning years, when income replacement is critical.
2. Build wealth
If you want to use life insurance as a long-term wealth-building tool, permanent life insurance can provide cash value. The premiums paid into a cash value policy can earn returns or interest on a tax deferred basis. The cash value pays for the costs in the policy, but excess cash value can grow over time and is accessible to you throughout your lifetime.
There are different types of permanent life insurance — such as whole life, universal life, variable life and variable universal life — and each has a different approach to growing the cash value. Some policies have more exposure to the market, while others are not dependent on market returns but rely on interest crediting. It's important to consider the associated risks when exploring permanent life insurance as an additional tool to build wealth.
3. Provide a flexible source of cash
When properly structured and funded, a permanent life insurance policy can offer a tax-efficient way to build cash value, augment retirement savings or even help pay for college, allowing you to access your principal and tax-deferred growth for future needs.1
Here are a few ways you can use the cash value to your advantage1:
- Withdraw cash tax-free: Generally, if the amount you withdraw doesn’t exceed the amount you’ve paid in premiums (and it’s not a modified endowment contract for tax purposes), the withdrawal will not be subject to income taxes.
- Borrow against the policy’s cash value for retirement income or other purposes: You are technically not required to repay the loan, though it will accrue interest, and the amount will be deducted from the policy’s death benefit. Accessing policy cash value through loans and surrenders may also cause a permanent reduction of policy cash values and death benefit, and negate any guarantees against lapse.
- No withdrawal penalties or distribution penalties: Unlike qualified retirement accounts, when properly structured, there are no federal income tax penalties for withdrawals taken from life insurance policies before age 59 ½, and no minimum distribution requirements. However, withdrawals can impact how long the policy will last and can permanently reduce the death benefit.
4. Help pay for long-term care
Traditional long-term care (LTC) insurance offers a way to cover the cost of care if you need assistance with routine daily activities. However, if you’re concerned about the possibility of not needing the coverage, a life insurance policy that includes a long-term care or chronic care benefit is an alternative solution.
It can help pay for LTC expenses, while still preserving a death benefit for beneficiaries if you don’t end up needing care, or don’t use all of the entire benefit. However, you must have a permanent life insurance policy to take advantage of such options.
Here are two ways life insurance can be used to help pay for long-term care:
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Hybrid life insurance policies
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Permanent life insurance with long-term care or chronic care riders
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- A life insurance policy is linked with policy riders that can provide long-term care benefits.
- Any use of long-term care benefits will result in the policy’s death benefit being reduced, though most hybrid policies will still offer a nominal death benefit even if you use up LTC coverage.
- Hybrid products offer LTC benefit extension riders that can allow for a longer period of coverage beyond just the policy death benefit.
- Some products offer guaranteed expenses that won’t increase over time, and there are often more flexible payment options than traditional LTC policies.
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- A long-term care or chronic care rider is added to a permanent life insurance policy, often at additional cost.
- As with hybrid policies, any rider benefits paid out will result in a reduction of the death benefit.
- Generally, the benefits from long-term care or chronic care riders may not be as comprehensive as those that come with traditional long-term care insurance or hybrid policies.
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Learn more: How to plan for the cost of long-term care
5. Leave a legacy
Life insurance can be an efficient way to pass on wealth as part of your estate plan, providing potential tax benefits and reliability for your loved ones and your estate.
- Tax benefits: Regardless of whether you have a permanent or term life insurance policy, the death benefit is generally income tax-free for beneficiaries. And if you are concerned about federal estate taxes or live in a state with an estate or inheritance tax, putting a life insurance policy in an irrevocable life insurance trust (ILIT) can typically remove the death benefit from your taxable estate, while still passing on the death benefits for your named beneficiaries.
- Reliability: Life insurance gives your heirs a level of certainty that investments cannot guarantee. While investments may vary in value over time, a life insurance policy offers predictability for those you leave behind. All guarantees are based on the claims-paying ability of the issuing company.
6. Amplify support for the causes you care about
A life insurance policy can also be a tax-efficient way to leverage a sizeable charitable gift for an organization or cause you care about. Here are a couple ways to achieve this:
- Transfer ownership of a permanent life insurance policy to a qualified charity: The charity can name itself the beneficiary and receive the death benefit when you die, providing the organization with what is often a much larger gift than you might otherwise be able to offer. By transferring the policy to charity, you can take an immediate charitable contribution tax deduction, and the policy will be typically removed from your estate for estate tax purposes.
- Name a charity as the beneficiary of a life insurance policy: This allows you to maintain ownership of the policy and access to the cash value while you’re living. It also gives you the option to change the beneficiary. If you name a charity as a beneficiary, however, you will not receive a charitable contribution tax deduction, and the policy could be counted in your estate when determining the estate tax liability. However, a charitable deduction would likely be available. You also must continue paying premiums to keep the policy in force.
Learn more: Estate planning and charitable giving: Strategies to make an impact with your estate
Protect your financial future
We can help evaluate ways life insurance can protect your family and provide options to help you reach your financial goals. Work with us to understand your policy’s features, benefits and fees and to discuss what’s appropriate for you based on your financial situation and objectives.