The value of life insurance extends far beyond its traditional use as a way to protect your family in the event of an early death. In addition to affording peace of mind, life insurance provides the following key benefits:
Safety and Protection
Stability and Diversification
Just like a 401(k) or similar deferred compensation plan, a cash value life insurance policy will grow tax-deferred and if structured properly, withdrawals are taxed on a first-in, first-out basis. With very rare exceptions, death benefits are paid to the beneficiary or beneficiaries of the policy income tax-free and it’s even possible to structure the policy to completely escape estate taxes. If it is anticipated that estate taxes will need to be paid, IRS-approved estate-freezing techniques may be used to reduce the tax burden while simultaneously creating wealth in subsequent generations. Of course, the death benefit may be used to satisfy any estate tax obligation resulting from your death.
Income tax-free loans can also can be made during your lifetime at little or no cost in the event of an emergency or to capitalize on an investment opportunity.
SAFETY AND PROTECTION
While life insurance can help protect your family in case of an early death, it can also be used later in life to protect against the risk of living too long. Additionally, a policy can be effective in shielding your family from the financial and emotional strain of long-term care. If you are sued for outstanding debts or file for bankruptcy, depending on your state’s regulations, your insurance policy may provide creditor protection.
STABILITY AND DIVERSIFICATION
Financially perceptive investors understand that life insurance is not correlated with their stock and bond portfolios and adding insurance to a portfolio may even lower the level of risk without sacrificing return. In fact, most cash value insurance products guarantee against losses and depending on the policy, you can be guaranteed an annual, predictable, long-term rate of return well in excess of yields provided by AA-rated bonds.
The flexibility and peace of mind along with the income and estate tax benefits that life insurance offers is second to none. From income replacement to special needs planning, funding buy-sell agreements and providing both short-term and long-term access to liquidity, the flexibility that life insurance provides is the reason why so many have wisely made it a cornerstone of their personal finances.