Life Insurance has many uses in addition to what you probably think of as its traditional purpose. Life insurance is often the cornerstone of financial & estate plans. You can use life insurance as a savings tool for education, for your own retirement, even for gifts to charity. Let’s take a closer look at some of these strategies and considerations that as they may relate to your own personal financial strategy.
Life insurance as a savings vehicle
Permanent life insurance has a savings component called cash value. This cash value typically increases every time you make a premium payment. You can borrow against the policy’s cash value to pay for college tuition, or you can give yourself a loan now and then. Policy benefits are reduced by a loan, loan interest and/or withdrawals, Also, Dividends, if any, are affected by policy loans and loan interest.
Life insurance and retirement planning
Many people use cash value life insurance both to save for their retirement and to provide a death benefit for their beneficiaries. Some companies offer their employees life insurance purchase options under their retirement plans. Some people also use cash value life insurance as a substitute for a qualified retirement plan. If your company does not offer a retirement plan or if you have already contributed the maximum amount to your qualified retirement plan, a cash value insurance policy can offer tax benefits.
Life insurance and estate planning
Life insurance is a crucial part of most estate plans. It can ensure that your loved ones get money without going through the potentially lengthy and sometimes expensive probate process, and it may solve cash flow problems caused by your death. In order to use your life insurance effectively for estate planning purposes, you need to structure the policy properly and be aware of various issues. Ownership of the policy, ben- eficiary designation, and tax consequences are all-important factors to consider.
Life Insurance and Charitable Giving
Life insurance can give you an outlet for your charitable inclinations. You can do this by setting up a charitable remainder trust or naming a charity as a beneficiary on your life insurance policy. In addition, you can enjoy the tax breaks that result from your generosity
Business use of Life insurance
Life insurance is an integral part of a smart business plan in several ways. It is often used to fund buy-sell agreements. It can also be used as an incentive to attract and retain em- ployees. The company may own insurance policies on key employees so that in the event of a key employee’s death, the company is compensated for the financial loss of the employee, as well as the cost of hiring and training a new employee.
Taxation and Life insurance
There are various tax issues associated with life insurance. In general, the life insurance death benefits aren’t subject to income taxation, but that is hardly the end of the story. It is im- portant to understand the taxation of benefits, the tax-deferred buildup of cash value, and dividends (which may be declared by issuing company & are not guaranteed). It is important to work with a licensed professional that will assist you to avoid traps and plan accordingly.
Life insurance Provides a Vehicle to Address concerns of unmarried couPLes
Life insurance can provide a vehicle to address many concerns of unmarried partners. As the surviving partner in an unmarried couple, you may face a greater financial burden in maintaining your standard of living after the death of your partner than does a surviving spouse. Life insurance offers a way to replace income after the death of your partner, provide cash to pay estate taxes, and provide funds that avoid probate. Furthermore, tax laws don’t shelter your estate, as they do for a married couple. In addition to providing lost income from the death of a partner, life insurance offers a means to provide cash to pay estate taxes, and provide funds that avoid probate.
Life insurance avoids Probate
If a beneficiary other than your executor or estate is named, life insurance proceeds don’t go through probate. Because of this, life insurance offers a way to provide for your un- married partner without the complications of a will. Some of the advantages of avoiding probate are:
1. The funds are immediately available at death and
2. The distribution is not as likely as a will to be contested by relatives who may disapprove of your relationship.
How much Life insurance do I need?
You should have enough life insurance to enable your loved ones to continue the lifestyle they were accustomed to before your death. If you have children, you may want to make sure that your children’s college education bills will be paid. At the very least, you will want to ensure that your loved ones will be able to pay for burial expenses and pay off any of your debts. Keep in mind you may need to demonstrate an insurable inter- est to purchase life insurance on each other. Married couples are assumed to have an insurable interest. Couples who own a house or business together are also considered to have an insurable interest, although only up to the value of their shares of the mortgage or business. You can prove insurable interest by providing evidence of jointly owned assets and, possibly, copies of your wills or trust documents.
Material discussed is meant for general illustration/informational purposes only & is not meant as tax, legal or investment advice. The information has been gathered from sources believe to be reliable, note that individual situations vary, therefore the information should be relied upon when coordinate with individual professional advice.
Story by Lynn Yeldell
L Style G Style – Storyteller of the Austin LBGT Community.