Many people who have life insurance are paying premiums for one reason—to assist their families after they've died.
It's an honorable decision, paying for something now that will benefit our loved ones later.
But it's worth knowing that you can actually let your life insurance policy work for you today, long before flowers are put on your grave or your ashes scattered to the wind.
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Yes, you read that right. Life insurance can provide more than just a death benefit. I believe it's an underutilized asset class, and its potential is especially important in today's weak-interest-rate environment when it's difficult to generate much of a return without taking risks.
Consider these added benefits of having life insurance:
1. Provide for life stage needs.
You can access an insurance policy's cash value, as it accumulates, through a loan or withdrawal when needed. When structured properly, it can fund part of your retirement, take care of a substantial financial obligation, assist in a family emergency or pay for college. It is important to know, however, that policy loans and withdrawals will reduce available cash values and death benefits.
2. Take advantage of less restrictive terms.
For most life insurance policies, withdrawals are free from federal income tax to the extent of the investment in the contract, and policy loans are also tax-free so long as the policy does not terminate before the death of the insured. You can also leverage IRA distributions to create a more tax efficient transfer of IRA assets and potentially increase family wealth using a properly structured life insurance trust funded with permanent insurance.
3. Tap your policy for income.
With cash value building up over the years, you have other options for turning life insurance into income, including cashing the policy in, accessing a portion of its cash value and leaving the rest as a death benefit, or leaving the whole policy as a legacy for your family. Some policies even allow access for long-term health care needs. The withdrawal may or may not be taxable depending on whether the policy was a modified endowment contract.
4. Practice saving.
Beginning to pay for an insurance policy as you start your adult life gets you into the habit early of saving for later. A lifetime of monthly or quarterly premium payments can pay off the closer you get to retirement.
5. Cover your own estate taxes.
Contact your financial adviser or attorney to arrange for your insurance to offset estate taxes after you die. This prevents your family from having to sell assets or investments, particularly when it isn't advantageous, in order to pay the IRS, and if properly structured, can provide a tax-free legacy.
While primarily used for the death benefit, an insurance policy doesn't have to be about paying for a funeral or have short-term impact for your family. With thoughtful consideration and with the help of a properly licensed financial adviser, a life insurance policy can improve your life even while you are living and have a long-term positive impact on you and your family.
Kathleen Nolan, an Investment Adviser Representative and insurance professional, is president and owner of Family Focus Financial Group in Wall, New Jersey. The firm offers clients a wealth management process that includes investment consulting, wealth preservation, tax strategies, income planning and asset protection.
Kim MacCormack contributed to this article.
Investment Advisory Services offered through Global Financial Private Capital, LLC, an SEC Registered Investment Advisor. Global Financial Private Capital and Family Focus Financial Group are not affiliated companies. Not intended for specific legal or tax advice. Any views expressed are for information purposes only and should not be construed in any way as an offer, an endorsement, or an inducement to invest or purchase insurance products.
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