Life insurance is one of the most misunderstood products in the financial industry. The fiction that most of us believe is that life insurance policies only provide benefits when we die, most of the myths we hear aren’t worth listening to, and the fact is we don’t realize life insurance can make living so much better.
Choices When it Comes to Life Insurance
Most of us recognize that life insurance provides peace of mind to you and monetary benefits to your heirs. If that’s all you know and it’s enough for you to purchase a policy, great. If that’s not enough, then read the facts about the ways today’s modern life insurance can be beneficial while you’re alive. Perhaps that new knowledge will debunk the fictions and myths you’ve heard and convince you to add a policy to your portfolio.
TERM LIFE INSURANCE: Term life insurance is a simple, straightforward insurance policy. The policyholder pays regular premiums. If they die while the policy is in effect, their beneficiary receives a death benefit. The defining factor when it comes to this type of insurance is the “term” - how long the policy is active. Term life policies expire after a set number of years. Additionally, term life insurance is relatively inexpensive, so young families looking to obtain coverage will find this option provides peace of mind while fitting within their budget.
PERMANENT LIFE INSURANCE: Permanent life insurance is designed to last from the time of purchase through the remainder of your life. It provides a death benefit to a beneficiary and an investment component allowing the policyholder to accumulate a cash value. The cash value grows tax-deferred and the policyholder has the option to take loans without limitations. Permanent insurance policies are typically more expensive because they last from the time you buy into the policy until death, as long as you pay the required premiums.
FACTS: Commonly Known Benefits of Life Insurance
FAMILY PROTECTION: It’s pretty well known that life insurance pays a predetermined death benefit to cover your debts and funeral expenses as well as provide a financial allowance to loved ones. Term insurance is typically a lower-cost option geared toward young families with children; however, the benefits of more expensive permanent insurance to cover you as you age shouldn’t be overlooked.
Did you know: Permanent insurance affords you the option to take out a loan to pay for expenses like college, medical bills, lost retirement income, long-term care costs, and even estate taxes. Life Insurance 101.
SMALL BUSINESS PROTECTION: Think beyond business insurance. With the right life insurance policy, you can tap into the loan feature for expenses rather than risking personal collateral like your home. This ensures your family is safe from debt collection should the loan become due upon an untimely death. Further, your employees depend on their jobs for their livelihood, and a life insurance policy can pay off debts, keep your business running, and keep your employees working after you die.
Did you know: A buy-sell agreement is a must-have for any succession business plan by providing funds to buy out the deceased’s portion of the business ownership. Smart business insurance.
CHARITABLE PLANNING: If you have dreams of supporting your favorite nonprofit in an impactful way then you can set up a charitable rider naming your charity as the beneficiary, and your life insurance’s guaranteed death benefit becomes the ultimate endowing tool. This is a way to give more than you may have typically been able to while alive; for the recipient, there are no federal or state taxes or fees coming out of the amount given.
Did you know: You can go one step bigger and set up a policy donation: the charity will receive the entire face amount of the policy upon your death. By gifting a policy, you can reduce your taxable estate, which potentially saves thousands in estate taxes for upper-income taxpayers. Big impact donations.
BYPASS PROBATE COURT: The hassle of probate proceedings can be timely and costly especially when loved ones are coping with family loss. Having life insurance with a named beneficiary will help your inheritors avoid probate and receive the death benefit payment quickly.
Did you know: There are a few instances when probate will rear its ugly head 1) the primary beneficiary is deceased, 2) the beneficiary is under the age of 18 and can’t take ownership of benefits, and 3) there is no named beneficiary in which case the death benefit becomes part of the estate for the courts to manage. Avoiding court hassles.
PASS ON INCOME-TAX-FREE TO BENEFICIARY: Death and taxes aren’t guaranteed when you have a life insurance policy because life insurance allows the death benefit to transfer income-tax-free to beneficiaries. No matter the amount of the death benefit, beneficiaries won’t pay any income tax on the invested money they receive unlike other investments such as IRAs, annuities, and qualified retirement plans.
Did you know: A policy that doesn’t pay the death benefit right away could be subject to taxes on the interest earned during the time-lapse. Additionally, a high-value death benefit in your policy added on top of your full estate could be a factor when facing estate taxes. Know your taxes.
Are You Insuring Your Most Valuable Asset?
With a nearly 96-hour work-week and a six-figure annual rate, moms may be the most valuable workers in the country.
According to a recent study, only 56% of women have life insurance, compared to 66% of men
When women are covered by life insurance, the average death benefit is about 22% less than men
64.2% of mothers are the sole or primary breadwinners for their families up from 41% in 2017
The median annual “salary” of a stay-at-home mother in 2019 was $178,201 (a 9.6% increase from the previous year)
On average, women live 6-8 years longer than men, yet they typically buy less life insurance coverage and save less for retirement than their male counterparts
1 Janet Hunt, April 26, 2020. “Top Benefits of Life Insurance for Women” [Online]. Available: https://www.thebalance.com/top-benefits-of-life-insurance-forwomen-4175911
2 Janet Hunt, April 26, 2020. “Top Benefits of Life Insurance for Women” [Online]. Available: https://www.thebalance.com/top-benefits-of-life-insurance-forwomen-4175911
3 Colin Seeberger, May 10, 2019, “Nearly Two-Thirds of Mothers Continue to be Famiy Breadwinners, Black Mothers are Far More Likely to be Breadwinners” [Onine]. Available: https://www.americanprogress.org/press/release/2019/05/10/469660/release-nearly-two-thirds-mothers-continue-family-breadwinnersblack-mothers-far-likely-breadwinners/
4 Salary.com September 5, 2020, “How Much Is a Mother Really Worth?” [Online]. Available: https://www.salary.com/articles/mother-salary/
5 Marguerita Cheng, July 12, 2018, “The Gender Earnings Gap and Retirement” [Online]. Available: https://www.forbes.com/sites/margueritacheng/2018/07/12/ the-gender-earnings-gap-and-retirement
FICTIONS: Uncommonly Known Benefits of Life Insurance
LIFE INSURANCE IS AN ASSET CLASS: Properly funded permanent life insurance policies build cash values that can be tapped into for use at retirement or if an emergency arises. Depending on the number of years that premiums are paid, and the internal rate of return offered by the insurance carrier, the cash value can grow to considerable sums.
LOANS YOU DON’T HAVE TO PAY BACK: Unlike bank loans or mortgages, you do not have to pay back the loan you take when borrowing from a permanent life insurance policy. However, when you borrow the money based on your cash value, the amount you borrow may reduce the death benefit from your policy’s life insurance portion.
A GOOD OPTION FOR RETIREMENT INCOME: Unlike other retirement funds, life insurance has no contribution limits, the cash value grows tax-deferred, distributions are tax-free, and there are no minimum required distributions. It can take 15 or more years to accrue enough cash for an income stream, but there is no approval process, so access usually only takes a few days.
TERMINAL ILLNESS PROTECTION: No need to suffer from a diagnosis when your insurance policy can alleviate the pain caused by the cost of medical care. If you qualify by having less than 12 months to live, you can use your policy to 1) access benefits with an accelerated death benefit rider, 2) take out a loan, or 3) buy additional coverage with a guaranteed insurability rider.
RIDERS THAT PAY CHRONIC AND LONG TERM: With a medical diagnosis and the proper rider to your life insurance policy, you can gain access to your death benefit early to pay for expenses. The chronic illness rider provides a fixed premium payment with the cash indemnity derived from your death benefit. The longterm care rider offers the accelerated death benefit plus an extended death benefit should you exhaust the first.
COLLEGE BILLS COVERED: Permanent life insurance is an unconventional and often underused way to help pay college tuition. The value of your life insurance policy is not part of the financial equation FAFSA uses when it comes to funding the college experience. So, while you’re paying into your policy, a portion is covering your death benefit, and a portion is growing a tax-deferred cash value waiting for you to borrow against to supplement your college funding strategy.
PROTECT YOUR BENEFICIARIES: If you have a beneficiary who isn’t great at money management, a spendthrift provision is a smart way to protect their future. This provision dictates how much and when a beneficiary receives all payments and names a trustee to oversee the distributions. The money in the trust is protected from debt collectors and lawsuits for added protection.
1 Thom Tracy, April 19, 2019, “How Life Insurance Can Help With Cash Accumulation” [Online]. Available: https://www.investopedia.com/articles/ fa-profession/090616/how-life-insurance-can-help-cash-accumulation.asp
2 Mila Arauju, April 30, 2020, “Borrowing From a Life Insurance Policy” [Online]. Available: https://www.thebalance.com/borrowing-from-a-lifeinsurance-policy-4056784
3 Grange Insurance, Life, “Supplement your retirement income with life insurance” [Online]. Available: https://www.grangeinsurance.com/tips/ supplement-your-retirement-income-with-life-insurance
4 Protective.com, September 1, 2020 “3 Ways to utilize your life insurance policy for terminal illness” [Online]. Available: https://www.protective.com/ learn/3-ways-to-utilize-your-life-insurance-policy-for-terminal-illness
5 Insurance andestates.com, February 15, 2019, “Long Term Care Rider vs Chronic Illness Rider” [Online]. Available: https://www.insuranceandestates. com/long-term-care-rider-vs-chronic-illness-rider/
6 Paul Kelash, September 24, 2018, “How to use life insurance to pay for college” [Online]. Available: https://www.marketwatch.com/story/how-touse-life-insurance-to-pay-for-college-2018-09-24
7 Elissa Suh, January 14, 2020, “How a spendthrift trust protects financially irresponsible loved ones” [Online]. Available: https://www.policygenius. com/retirement/spendthrift-trust/
8 Barbara Marquand, May 22, 2015, “Life Insurance for Parents of Children with Special Needs”, [Online]. Available: https://www.nerdwallet.com/blog/ insurance/life-insurance-parents-special-needs-children/
MYTHS: Two-Cent Advice that Doesn’t Add Up
I HAVE LIFE INSURANCE THROUGH WORK, SO I DON’T NEED MY OWN: Maybe it’s enough, but depending on your family situation, you may need more to cover things like estate taxes and to provide for your family when you’re gone. IT’S NOT AVAILABLE FOR OLDER PEOPLE: Even if you’re over 60, life insurance is a smart asset for your portfolio. As age increases, so do many expenses, which is why it’s important to have a plan to pay for estate debts and funeral expenses and perhaps leave something to your heirs. HEALTH PROBLEMS MEAN I’M UNINSURABLE: With some exclusions, most people with an illness can still be insured; it just might be a bit costlier. If your condition is going to require medical care, the right policy can help cover those costs as opposed to depleting your savings.
I’M SINGLE WITH NO FAMILY SO I DON’T NEED IT: Single or not, expenses will still occur, so you need to plan accordingly: funeral costs can be in the thousands, debts need to be paid upon death, and medical bills add up quickly.
I’M BETTER OFF JUST INVESTING MY MONEY: You’re risking a lot with no guarantee in the stock market as well as accepting tax implications that don’t come with insurance – both of which fall on the shoulders of those left behind.
INSURANCE IS TOO EXPENSIVE: Consider that most people spend more to insure their “things” than to insure their life and family. It’s important to know that some coverage is better than none, it’s less expensive the earlier you buy it, and we never truly know what tomorrow will bring.
If you’re convinced the facts outweigh the fictions and myths, it’s time to take the next steps.
Consider your family’s needs and priorities when figuring out the amount of life insurance to purchase. Recognize that not all companies write all life insurance policies, so know the type of coverage you want before you begin comparing quotes. Gather your health and family history information before you start the application process and determine who you will name as beneficiaries (have on hand the Social Security numbers and birth dates of all parties). Finally, it’s important to review all coverage options and how it will play into your financial portfolio with your financial professional before deciding which life insurance policy is right for you.
The content within this document is for informational and educational purposes only and does not constitute legal, tax or investment advice. Customers should consult a legal or tax professional regarding their own situation. This document is not an offer to purchase, sell, replace, or exchange any product. Insurance company products and any related features, benefits and/ or guarantees are backed by the claims paying ability of the issuing insurance company. Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results. Some types of permanent insurance may require consistent premium payments, or the policy may risk lapsing. Unpaid policy loans decrease future death benefits paid to beneficiaries. Excessive policy loans may cause the need for future premium payments. If an insurance policy lapses due to excessive policy loans or if a customer surrenders their policy, one may be subject to tax payments for any policy loans that exceeds the premiums paid. Excessive premium payments may cause the policy to become a modified endowment contract. Policies classified as modified endowment contracts may be subject to taxes when a loan or withdrawal is made. While life insurance death benefits may be income tax-free, life insurance death benefits may be subject to certain estate taxes.