The Many Uses For Life Insurance:
Life insurance is not about the person that dies, but the people they leave behind. In its basic form, it provides financial resources for your beneficiaries. Did you know that death-benefit proceeds of a life insurance policy are almost never subject to federal income taxes? It’s true and very important to know for estate planning. Most people think about life insurance in terms of paying for final expenses and leaving a death benefit for your family, but it can be utilized in so many more ways:
- Pay for funeral costs
- Help pay the bills and meet ongoing living expenses
- Pay off outstanding debt, including credit cards and the mortgage
- Continue a business
- Finance future needs like your children’s education
- Protect a spouse’s retirement plans
It can help you accomplish other goals as well:
Wealth Transfer: The death benefit from life insurance is not taxed at the federal level, but is subject to federal estate taxes. Having the trust as the owner of your life insurance policy can make it exempt from estate taxes. When the insured dies, the money will remain in the trust paying an income to the beneficiary and heirs.
Buyout of a Business Interest: Typically when there are multiple owners of a business, the owners take out insurance on each other in the case of death of one of them. This policy usually accompanies a Buy/Sell Agreement between the owners to ensure that the remaining owners pay a fair market value of the deceased person’s share. The proceeds from the policy will help to buy out the deceased’s share of the business from the heirs. The policy allows the remaining owners to buy out and not have to use their operating income.
Generating retirement income: Some executives will use life insurance to fund a split-dollar plan. The employer gives funds to the executive to fund the policy, and the employer is the beneficiary. The funds from the policy can be used to provide income for the executive’s family.
Borrowing. Most permanent life insurance policies allow for loans or partial withdrawals up to 80% of the surrender value of the cash value. As long as the policy is in force, loans are not subject to income tax.
Types of Life Insurance:
Term Life Insurance: Term life insurance policies provide affordable, temporary coverage. Term policies contain no cash value and are designed for death benefit protection only. The premiums may be level for the first 10, 15, 20 or 30 years, depending on the policy selected. Because the death benefit protection is for a limited period, the premium is often the lowest of all types of life insurance policies. However, after the level term period, premiums go up significantly and increase annually.
Whole Life Insurance: Whole life is the traditional form of permanent life insurance. It provides the certainty of level premiums, a guaranteed interest rate and a guaranteed death benefit. Whole Life provides the extra security of guaranteed protection at affordable rates, yet it includes the element of cash value accumulation.
Universal Life Insurance: Universal life is a flexible premium, adjustable life insurance product that provides you with the flexibility of choosing the policy features that are appropriate for you and adjusting those features as your financial priorities and needs change. Policy cash value that grows on a tax-deferred basis2.
Indexed Universal Life: Indexed universal life is a version of universal life that combines death benefit protection with the opportunity to grow cash value through an account that credits interest based upon the upward movement of stock market indexes – without the risk of investing directly in the market. The Index Account features a zero percent floor which guarantees your account won’t earn less than zero percent due to poor market performance.
Variable Universal Life: Variable universal life insurance is designed to provide solid death benefit protection and the potential for cash accumulation. The combination of flexibility, attractive tax features, and Separate Account investment portfolios create life insurance products that you can tailor to your insurance needs, risk orientation and long-term objectives.
Note: Guarantees are based on the claims-paying ability and financial strength of the issuer. Insurance policies may have fees and expenses, limitations, exclusions, holding periods and terms for keeping the policy in force. Surrenders, withdrawals and loans will reduce an insurance policy’s cash surrender value and death benefit.