A life insurance policy offers important coverage, but not only because of the financial assistance it provides should an unexpected death occur. Living life insurance policies are also valuable retirement planning tools.
Not Just About the Death Benefit
When most people consider purchasing life insurance, they focus on the death benefit. This is the most common reason for buying life insurance, and it’s a good one. The death benefit can cover funeral and medical expenses. It can also be used to pay mortgages, tuition and other bills. In general, it can maintain a healthy financial situation for the surviving family after the loss of both a loved one and a source of income.
Furthermore, beneficiaries can select to receive the payment as a one-time lump sum that can be used to cover immediate expenses, or as part of a long-term payment schedule that can be used to facilitate financial stability over the years to come. There are tax advantages as well. Although the IRS states that interest received must be reported, the death benefit is generally not taxable.
Looked at in this way, a life insurance policy is crucial to the retirement planning of the survivors. Without a policy in place, a premature death could potentially wipe out the survivors’ existing savings and derail any retirement plans. And while this may not be something that most couples want to think about, it is a possibility that requires thought. According to Census Bureau statistics, 24.4 percent of people age 65 and older were widowed in 2015.
A life insurance policy adds a crucial layer of financial stability to retirement planning. The practical uses of life insurance do not end there, however.
Build Cash Value
A universal or whole life insurance policy accumulates a tax-deferred cash value over time. The insured can borrow against this cash value. The insured can also surrender the policy for the entire cash value.
This means that a life insurance policy has value above and beyond the protection it offers in the event of a premature death. If the death benefit is not needed early on – as all policyholders hope will be the case – the policy becomes another source of income.
Again, the tax situation is attractive. When borrowing some of the cash value of a life insurance policy, a significant portion – generally an amount equal to what the policyholder has paid in premiums – is nontaxable and does not count as income.
Some people overfund their universal life policies. The money can later be withdrawn without owing taxes or adding to the reported income for the year. Used this way, the policy bears a similarity to a Roth IRA retirement account, but without restrictions on the investor’s income or age.
As with all investments, there are issues to consider, including tax laws. With the help of a knowledgeable financial planner, a life insurance policy can be an important part of a retirement portfolio. It’s the only multi-tasking financial tool that can help you and your family in retirement, sickness and death. Contact us to learn more.