When creating an overall financial portfolio, investors typically consider how to allocate assets into categories such as growth, income, and cash or cash equivalents. But, often they will tend to forget about something that, without it, could be detrimental to literally everything else that they’ve worked for. That is life insurance.
Life insurance is, in many ways, one of the most essential elements in a financial portfolio. This is because it can provide protection for all of the other assets – especially in the case of the unexpected.
For example, in its most basic sense, life insurance is made to protect a surviving spouse or loved ones from the financial consequences of unpaid debt and / or ongoing living expenses should a primary income earner pass away.
But life insurance can also be used in other financial planning areas, too.
Using Life Insurance for Diversification
In addition to death benefit protection, there are many life insurance policies that will also provide policy holders with a way to protect their cash value from market volatility, as well as from the high cost of a long-term care need.
In other cases, cash value life insurance can also be used as a primary or a secondary financial vehicle for saving for a child’s or a grandchild’s future college education expenses – and oftentimes this can provide a much more flexible mechanism even than the 529 college savings plan.
Life Insurance as an Income Supplement
If structured in the proper manner, certain cash value life insurance policies today can also be set up to help policy holders in supplementing their retirement income on a tax-free basis. With all permanent life insurance policies, cash value is allowed to grow tax-deferred. This means that there are no taxes due on the gain on those funds until the time they are withdrawn.
In many cases, a life insurance policy owner will either borrow or withdraw their cash value for a variety of different needs. These can include paying off loans, funding the college expenses of a child or a grandchild, or even taking a nice vacation.
The money that is taken out as a loan will not be taxed to the policy holder – and, it can typically be borrowed at very low interest rates (usually quite a bit lower than that of a bank or other lender).
Over the past several years, many pre-retirees have been taking advantage of the many benefits that indexed universal life insurance (IUL) can provide. This is because the cash in these policies has the opportunity to increase based on market indexed linked growth, yet it is protected from downward market movements by being credited with a return of 0% in negative periods.
Cash can be borrowed tax-free in order to supplement retirement income – and, if the policy holder passes away, any unpaid loan balance will simply be charged against the death benefit that is paid out to the policy’s beneficiary.
Making Your Financial Plan Complete
In all, while life insurance should still be considered for its death benefit protection, it also has so much more to offer – and because of that, it should not be thought of as just a “stand alone” product, but rather as an important and essential piece of the overall financial planning puzzle.
When constructing your overall financial plan, it’s important to be sure that you have the right type and amount of life insurance coverage. This is because you don’t want to leave your loved ones short just in case of the unexpected.
When choosing your life insurance plan, know that not all policies are the same, so you want to be sure that you shop for the policy, the benefits, and the insurer that will be the best for you and your specific needs and goals.
An independent insurance advisor can help you to fit the coverage to your plan, as versus the other way around. By working with many different life insurance carriers, going with an independent agency will allow you to shop in an unbiased manner while putting all of the pieces together when you’re ready to move forward.
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