5 Ways to Use Life Insurance
Updated: Mar 25
Insurance has been the backbone to a strong financial portfolio for centuries. It is no wonder why so many people rely on it's benefits to protect against financial loss for different reasons important to the insured. In this article, we will outline some of the most common reasons a person will purchase a Life Insurance policy. Yet, there are so many more reason. As long as you, your loved one, or business partner will suffer a financial loss if something happens to you or them, a life Insurance policy can be purchased.
It is extremely important to outline and understand your insurance needs prior to speaking with a professional. This will help elevate the possibility of being sold something that is unfit for your needs. So we put this article together as a general guide for these type of things. Although in some of these situation you may can benefit from other type of policies depending on your specific goals. Please keep in mind each plan qualifications are different based on carrier and product applying for.
Paying for their own funeral and Final Expenses
While often times this is the most thought of when asked about Life Insurance. It is often the last reason why people purchase life insurance. The average funeral cost approximates to about $7,000 to $12,000. These funds should be used from a final expense policy to cover these cost. These policies are designed for final expense payout and favorable underwriting guidelines. You are just required to answer some health questions. In some cases they even have a guaranteed issue policy where you do not have to answer health questions. Making it that much easier for you final arrangements to be taking care of. These are great if you have health issues or your focus is just on smaller coverage amounts. If your younger with great to fair health you can qualify for a better deal on another product. Depending on your needs of course. The face amounts to these policies usually doesn't exceed $50,000. They're great for small death benefits, small inheritance, small charity/worship centers donations, remaining bills, etc. You can also use a Term which will allow larger face amounts but require underwriting in most cases. If you're older or have some health issues you may not qualify for a term. Yet the premiums will be much more affordable if you can get one of these plans. Terms will only cover you for a specific amount of time. Such as 10, 20, 30 years. So if this need will go away in a few years a term policy might be right for you. An IUL is a permanent policy that grows cash value quicker than any other Life Insurance policy out there if designed correctly for the client need. These also require underwriting. Yet I feel this will be an over kill for the sole purpose of covering your funeral cost. You pay higher premiums and if you are just using it for funeral cost you have paid a lot of money into a product you couldn't benefit from. IUL are good for living benefits as opposed to final expenses and funeral cost.
There are lots of people who has not been privileged to have received an inheritance. For many of them that's something only for the wealthy. For others it was eating up in Taxes and debt. Inheritance doesn't have to be for the wealthy any longer. It doesn't have to be eroded from taxes and debt. As long as you have a steady income and fairly decent health, you can fund a life insurance policy and leave the death benefit as an inheritance for your loved ones. Life Insurance is a tax free way to leave money as an inheritance. According to Federal Reserve in a study they conducted in 2013, the average inheritance for the top 5% of US households received $1.1 million, the bottom 50% received approximately $68,000 and the middle 45% received $183,000. A permanent life policy maybe your best bet in this scenario. This is ideal because a Term could mature prior to you passing on. Leaving your loved ones with no inheritance. However, if this need will go away in the future a Term maybe your best option. With a permanent policy, you will have coverage for your entire life no matter what age you pass away. You can use a IUL but again those are better equipped for Living benefits as opposed to death Benefit. Although, they still pay a death benefit tax free. An Insurance policy for inheritance purposes would be anywhere from $50,000 to $1 Million dollars+.
Many people are using Life Insurance to fund their retirement plans. If you have read our blog on "How to use Life Insurance as Tax Free income in retirement" you'll understand already that we do not solely recommend fully planing your retirement using Life Insurance. Rather use it in addition to your current retirement plans. This allows you to offset taxes in retirement. The product recommendation is by far an IUL policy. This is because it is the faster growing cash value Life Insurance product out there. There are really no other comparison for an insurance product to be use in retirement. Term doesn't work because there is no cash withdraws or loans available. A regular Whole Life policy wouldn't work because the cash value amount wouldn't be sufficient for the income needed in retirement. How is this done? You make your monthly premiums and the insurance company will take a portion of the premiums and place them into a bucket. These funds are then linked to an index. Such as the S&P 500. You will received the gains up to the cap amount on the success of the market. You are protected from the loss in the market meaning you will not lose any of the principle based on the market. You will however still need to pay fees, loan cost, etc even in the down market. Which can eat away at the cash value. Please be aware of that when being sold a IUL. A lot of agent will push to move your entire retirement fund into one of these policies. I say run and run fast from those type of agents. These plans should be structured properly in order to maximize your retirement funds.
Many mortgages have a term of 10, 20, 30 and sometimes even 40 years. Many people do not want to leave the burden of paying off a mortgage behind to their loved ones. Yet they still want the house to be part of their estate. It can be left to a spouse, kids, family, etc. While traditional mortgage insurance have a declining death benefit. You will continue paying the same premium amounts. The beneficiary are usually the bank who owns your house until the mortgage is paid off. You are unable to leave any part of the money to a loved one. Because of these restraints many people have opted into purchasing a Term policy for this specific need and rightfully so. Term policies reign in this particular need. As you only pay a premium for the amount of time the policy is in force. You also get to choose who the beneficiary will be. Your premiums and the face amount stays the same. So that means if you take out a policy for $250,000 and you owe $100,000 left on the house when you pass. You're loved ones will receive the full check of $250,000. Where the loved one will pay the remainder of the house off and have a small inheritance of $150,000 and a house.
High Net Worth Estate Tax
It is very important to plan for Uncle Sam in the transferring of your estate. The federal estate tax wants up to 40% owed to them when its time to transfer your estate. If you do not know what an estate tax is, it is a tax imposed on the transfer of your estate after you pass away. The federal estate tax is generally for really high earners. People with an estate worth $11.58 Million in 2020. But, do not forget that the state can pose an estate tax as well. Those range from anywhere between 18% to 40%. As you can see Taxes alone get eat away at your estate. Don't forget about the debt you may owe. Although a house left to the surviving spouse usually are not counted for estate tax. There are so many other assets that are. A life insurance policy can help with those costs or even just leaving something for your loved ones. It is best to use permanent life insurance for these type of policies. As they will cover you for your entire life. You can often times use a Term policy which again is only for a specific amount of time. When planning for this make sure the professional understand two key things. An insurance policy could be included in your estate tax if the insured makes the policy out to their estate rather than an actual beneficiary. The other way it could be included in the estate tax if the deceased insured owned the policy on the date of death, the entire death benefit will be included.
Insurance Agents has been under fire from so many financial professionals. Some of this is rightfully so. Because, agents are not doing what's best for the client needs. They are just selling products just to make a commission. Vivo National is different in this regards. We want you to be aware of the industry. The financial industry is based on sales. Each financial professional is looking out for their industry while spreading false information to the internet about other industries. This is sad because you take away the true meaning of some financial products. At Vivo National we understand the full financial picture. We embrace all financial industries because they all have a place for your financial health. You should never take advice from someone who is not licensed in that field. A life insurance agent can not sell your stocks and a stock broker can not sell you Life Insurance. When making financial decision be sure you trust your adviser and they are licensed in what they are giving advice about. If they are not they are spreading opinion and could cost you financially in the long run. A lot of Financial industry professional tell you to buy term and invest the rest. This is not accurate advice. Understanding your needs is what is important. That way you will not purchase a policy that is not needed for your needs. This is why we created this article to educate our clients.