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- Permanent life insurance can build cash value.
- Experts recommend investing in life insurance as an aggressive financial vehicle.
- Work with a tax professional to minimize or avoid taxes on life insurance.
I first dipped my toe in the proverbial life insurance waters when I was 27. My then-husband and I were newly married (without kids) and building a house. When someone offered the sage advice that we purchase a pair of term life insurance policies, ensuring peace of mind and a guaranteed death benefit should one of us die within the 30-year term of our mortgage, we dutifully obeyed. The process was easy, and our rationale was simple.
In a worst-case-scenario level catastrophe, neither of us would be on the hook for a monthly payment we could not afford alone. More importantly, our home and family would be secure. Fast forward a bunch of years (ok, two decades), and more than a few things have changed.
I’m divorced, I have two dependents, and perhaps, most importantly, I’m two decades closer to retirement. All these factors had me thinking about my big-picture financial future in a new light. Namely, should I buy life insurance? Beyond that, how do I use life insurance to build wealth? Seasoned financial planners make a few recommendations.
Anticipate Your Financial Needs
Understanding your current financial picture and envisioning a distant point down the road is integral to building a budget and planning for the future. The decision to purchase life insurance ultimately boils down to your financial goals. This is true for all, from business owners and retirees to empty nesters and singles sans kids.
Many online life insurance calculators can help you get the ball rolling. However, all calculators I’ve seen utilize a similar formula based on the following criteria:
- Age: Statistically speaking, the younger you are, the lower the annual policy premium. The Society of Actuaries researches and estimates longevity and, as of 2001, updated the CSO mortality tables to age 121. In other words, life insurers set your premiums using the total payments you would make based on your target death benefit and divide it by the months or years between your current age and age 121.
Will the average person live that long? Advancing medical technology indicates it’s possible. Regardless, this calculation translates to lower premiums, especially when policies are purchased early.
- Gender: On average, women live longer than men and are typically less expensive to insure. However, this is subject to a complete picture, including medical records and other health-related data.
- Income: Ideally, your earnings and coverage should be proportional. Financial planners and life insurance agents can help you create a budget to determine how much you can afford. You can think about many permanent life insurance plans as high-powered savings with aggressive returns. As such, it becomes an asset as opposed to a bill.
- Relationship Status: The need for coverage rises when you share expenses with another adult, regardless of whether or not you’re legally married. Policyholders can use life insurance for financial planning at virtually any age. However, couples may want to cover existing mortgages, education and other costs for children, and more.
- Dependents: Life insurance can care for children and other dependents you leave behind. Some parents buy enough coverage to pay for living costs, college and other school-related expenses, and much more. The more dependents you have, the more you’d want to cover.
- Debt: Unfortunately, many grieving families also have to handle large debt loads after the passing of a loved one. A life insurance plan can cover money owed, from monthly mortgages to student loans. This includes debt accrued due to long-term illness that occurs after you’ve purchased a plan. Experts recommend planning aggressively for loved ones after you pass.
Some people factor in total assets and savings. Regarding debt load, assets like your home or car may be important considerations. However, an unexpected illness or accident can devastate a healthy savings account. Therefore, it’s essential to have proper coverage even if you have generous savings.
Consider Permanent Life Insurance
Often referred to as whole life coverage (as opposed to term life coverage), the perks of permanent life insurance are twofold: in addition to providing a guaranteed death benefit, this type of policy builds cash value. In other words, permanent life insurance acts as a savings account. How? Permanent life insurance offers:
- Stable growth without the inherent volatility, and by extension risk, associated with stocks and bonds.
- The option to leverage your accumulated cash value and borrow against it to pay monthly premiums, finance a dependent’s college education, or supplement retirement income. Savvy buyers may also ask if life insurance is taxable. Tax experts and financial planners can help policyholders withdraw to minimize the tax burden.
- Protection from debt collectors who might seize other assets. According to Nolo, except for shared debts with a deceased spouse, “If you’re the named beneficiary on a life insurance policy, that money is yours to do with as you wish. You’re not responsible for the debts of others, including your parents, spouse, or children.”
- The option for accelerated gains via indexed life insurance, which boasts cash-value growth based on current interest rates.
- Endless growth as long as you make payments with universal life insurance plans.
- Accelerated death benefits while living (depending upon your chosen coverage and additional riders) allow for a percentage of the face value of your policy to be issued to protect you if diagnosed with a terminal illness.
- Assets passed from generation to generation to ensure your loved ones are not burdened by costs associated with your final expenses, outstanding debt, and/or medical bills.
In other words, permanent life insurance is one of the quickest and easiest ways to start building wealth now, especially for individuals in their 20s, 30s, and 40s (who meet the requirements of underwriting, including a medical exam).
It’s not uncommon for financial planners to recommend buying life insurance with any free income. The growth and regulatory protections are unmatched by other financial vehicles.
Keep in mind: the younger and healthier you are at the time of application, the cheaper it is to lock in lifetime policy rates. Before purchasing any life insurance policy, we recommend meeting with a financial planner or experienced life insurance agent.
They can answer your questions and advise you on any penalties associated with early withdrawals, the cash value that would return to the insurer upon your death, and other unexpected loopholes.
When in Doubt, Supplement
Group life insurance is indeed a great addition to an employer’s benefits package. However, it’s essential to read the fine print and consider supplementing your coverage with a personalized policy designed for your needs. Most importantly, your employer-based plan is contingent upon your employment status. Once you leave the company, your life insurance policy is canceled.
Savvy buyers should pay close attention to the fine print, in general. In many cases, employer-provided life insurance provides little more than a guaranteed death benefit to cover final expenses.
Do you need a million-dollar life insurance policy, or is a smaller amount enough?That depends on the costs you’d like to cover following your death. Typical costs include outstanding personal debt, college tuition, and other expenses.
Begin by calculating the total lost income to be replaced in the event of your death. Then multiply by the years you’d like to cover. Remember, a licensed agent can help you determine your specific life insurance needs.
When contemplating your financial future, remember that life insurance and wealth building go hand-in-hand. Today, I’m 20 years closer to retirement than the last time I went shopping for life insurance. I’m also 20 years older.
Rather than panic and perseverate on the fact that I could (and probably should) have acted sooner, I’m leaning into a new mantra: There’s no time like the present to anticipate my future financial needs, supplement any employer-provided life insurance I already own, and consider the myriad types of permanent life insurance available to begin building tomorrow’s wealth today.
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