In recent years, particularly following the onset of the COVID-19 pandemic, there has been a marked surge in life insurance applications, reaching a 38-year high in 2021, as reported by LIMRA. This trend underscores a growing recognition of life insurance's value beyond its traditional role. As Kara Sherman, CFP®, highlighted in her Kiplinger article dated September 09, 2023, life insurance is more than just a safety net following one's demise; it's a versatile financial tool for living benefits and legacy planning.
At its core, life insurance protects those who depend on us financially. In the event of an untimely death, a life insurance policy ensures that our loved ones can maintain their lifestyle and pursue planned goals, like higher education or a comfortable retirement. This foundational aspect of life insurance cannot be overstated. It is about peace of mind and financial stability for those we care about most.
Life insurance can also be a dynamic tool for achieving financial goals while you are still alive. Many policies build cash value over time, which can be borrowed against for various purposes, such as launching a business or funding a grandchild's education. This aspect provides a flexible financial resource, often with favorable tax implications.
For high-income earners, in particular, life insurance presents significant tax advantages. Unlike other investment vehicles, such as Roth accounts or 401(k)s, life insurance policies allow for penalty-free access to funds before age 59½ and offer the option to repay at 0% interest, making them an attractive component of a sophisticated financial strategy.
With the U.S. Department of Health and Human Services reporting that around 70% of individuals turning 65 will require some form of long-term care, preparing for these potential expenses is crucial. Life insurance can play a pivotal role in this preparation.
Policies with long-term care provisions offer a way to fund these services, allowing policyholders to access a portion of their death benefit for chronic care costs. Hybrid policies provide a balanced approach, combining traditional life insurance benefits with long-term care coverage, thereby preserving retirement savings and reducing reliance on government programs.
Life insurance is a powerful tool for legacy planning. The death benefit from a life insurance policy is typically income tax-free when transferred directly to beneficiaries, potentially offering a more substantial after-tax inheritance than other assets. However, the death benefit value of life insurance is included in the value of the insured’s estate if any “incidents of ownership” were retained in the policy.
You can reduce ongoing taxation on earnings by reallocating a portion of your assets into a life insurance policy. Moreover, the tax-deferred growth of the policy's cash value can create new wealth, offering a strategic advantage over taxable accounts.
Every individual's financial situation is unique, necessitating a personalized approach to life insurance. What works for one person may not be suitable for another, making it essential to consider personal financial circumstances, coverage needs and legacy goals.
Navigating the complexities of life insurance requires expertise. Financial advisers can provide invaluable guidance, helping to tailor a life insurance strategy that maximizes benefits and aligns with personal objectives. As Sherman advises, consulting a professional is critical to implementing the most effective solutions.
Life insurance is a multifaceted tool, essential for posthumous financial security and achieving various financial goals during one's lifetime, covering long-term care needs and ensuring a lasting legacy. It's time to look beyond the traditional view of life insurance and explore its full potential as a cornerstone of comprehensive financial planning.
References: Kiplinger (September 09, 2023). “Four Ways Life Insurance Can Grow and Protect Your Wealth.”.
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