When most people think about life insurance it is a subject to avoid. It is a product that people need, no one wants to talk about and no one wants to sell.
Yet it is probably one of the most needed financial planning tools ever invented by humanity.
Most people think of Life Insurance as just a death benefit. It is much more than that when it comes to being part of your financial planning.
It is one of the best solutions for leverage available to most families. It should be considered an asset class in and of itself.
Why the death benefit is important
When it comes to financial planning, protecting the lives of those who bring in the income to create the wealth is paramount.
Families have been devastated from a decent quality of life to a survival mode simply because of the death of the main breadwinner.
So the first point in long term financial planning is the protection of the family against an unforeseen demise. Although a term policy, with no cash value, can do that it has its limitation.
Over the course of a lifetime, paying premiums, term insurance can actually be demonstrably more expensive than if a person would have purchased permanent insurance over that same time frame.
Remember at the end of the term, you have to buy another term which may have higher premiums due to age and health.
The death benefit proceeds, with all types of life insurance, come to the beneficiary income tax-free, which is a huge financial planning tool. It is a well leveraged financial planning tool for most people.
Income tax-free distributions
When it comes to investing, the cash value buildup inside a permanent insurance policy is very difficult to surpass with any other instrument. It does not matter if it is a whole life, Universal Whole life, Variable Life or even Index Universal life.
The cash value build-up is under the same IRA tax code rulings.
The money going into the policy by way of premium has the potential to grow tax-deferred. The money can be withdrawn out of the policy by way of loans or withdrawals without any income tax events. Now, of course, there is the cost of insurance and various other expenses within the policy. However, they are somewhat negated over time when compared to other investments or even retirement accounts.
Think about this for a second. An asset class that you can invest into, that creates an immediate high leverage protection benefit, grows tax-deferred and comes out income tax-free.
In addition to this, you can technically pull money from your cash value, and never have to pay it back because the death benefit is collateralized against the policy.
Free application for federal student aid (FAFSA) friendly
When it comes to paying for college, based on the Free Application for Federal Student Aid, there are certain assets that do not count against you as an asset to use for paying for college.
Among these are annuities, retirement plans and the cash value inside life insurance policies. These assets are removed from the financial aid formula.
So what does this mean? Thinking of permanent life insurance as an asset class, an investment product, allows you to put money into the policy and remove this money as an asset the government will tell you to use for paying for college.
In fact, it can be used to pay for college if necessary, but will not count as an asset in the financial aid formula.
So what are the main points of life insurance as important to financial planning? They are:
- Highly leveraged financial family planning solution
- Income tax-deferred growth
- Income tax-free withdrawals and distributions
- Removal of wealth from financial aid formula, which means you get to keep it for other uses if needed.
- No credit check on borrowing money against the policy
These are just a brief introduction as to the uses of life insurance in your family financial planning process.
