6 Uses Of Life Insurance In Financial Planning

Goal-oriented financial planning is not a new concept. Neither does diversification.

We know we have used life insurance in the past as a risk management tool to help you with income replacement during your years of work. But life insurance also plays an important role in diversified and comprehensive financial planning. It is important to first set your goals and then explore the life insurance options available to help you work towards those goals.

While there are more than six uses of life insurance in comprehensive financial planning, the following six are certainly the most popular, especially given potential changes in tax laws.

Income replacement

The core of why most people buy life insurance is income replacement to ensure that loved ones continue to have purchasing power and can stay in their home.

If you are in your core earnings years, which are between 35 and 55 years of age, income replacement is especially important. During these core working years there is a low risk of death, but a high pain point should death occur.

There is much – emotionally and financially – for loved ones in the event of a premature death. Worrying about how to pay the mortgage and pay the funeral expenses shouldn’t be one of them.

University planning

Another use of life insurance is to take out a policy and use the cash value to pay tuition fees. But if you take this route you will need a long runway or a high return on investment to raise enough money to pay the tuition fees.

If you choose to use this strategy, the present value of your chosen policy will not be included in the expected family contribution (EFC) that is considered in the grant, so you may receive additional help through student loans or scholarships.

The downside is that it could take a lot longer to grow than a 529 investment portfolio. It is important to speak to your financial advisor to make sure that you are using the strategy that best fits your situation.

Retirement planning

Life insurance is not a financial investment, but it does have this savings component. Think of life insurance as just another bucket – you put money in your 401 (k) or you put money in your Roth IRA. Life insurance is a conservative part of your investment portfolio that allows you to put in tax-deductible dollars and, unlike other vehicles, gives you control over flexibility and options.

With the right composition and financing, you can draw tax-free income over a certain period of time to supplement your retirement provision.

Tom Hegna, retirement planning expert and author, said he invested some of his personal wealth in cash-value life insurance as a source of tax-free retirement income.

“I think tax-free retirement income is becoming more important every year,” said Hegna.

Life insurance can also be used to replace income from your pension or social security. Finally, it can be used to cover maintenance costs. Many modern policies even have long-term care benefits.

Tax diversification.

Hegna noted that taxes need to rise to cover underfunded obligations like Social Security, Medicare, Medicaid, and state and military pensions.

In the case of life insurance policies with a cash value, the cash value increases with tax deductions within the contract and the beneficiaries are paid out federal income tax free. Under the Internal Revenue Code 1035, older present-value contracts that are not performing well can be exchanged for a newer tax-free policy.

Business needs

The use of life insurance and up-front buy-sell arrangements can help ensure business continuity. Whether you have two or more partners, you want to make sure that the business is passed on to those who are interested.

Estate planning

We all have an estate. Our goal in using life insurance in estate planning is to ensure that you hand over your estate efficiently and in the manner you want. There are always expenses that come with a discount. Life insurance provides liquidity to pay for some of these expenses and inheritance fees.

“Wealthy people often say they don’t need life insurance – and they may be right in the traditional sense – but they need a way to transfer wealth to their families as efficiently as possible,” said Hegna. “Life insurance enables you to transfer large sums of assets to the dollar for just a few cents.”

Other strategies include using an irrevocable life insurance trust to ease inheritance taxes. To accompany this, it is important to stay abreast of possible changes in inheritance tax that will have a major conversation over the next 18 to 24 months.

It is important to explore ways in which you can use life insurance as part of your comprehensive financial plan to help you achieve your goals. If you’re not sure how to do this, contact a professional who can help you.

source https://collegeeducationnewsllc.com/6-uses-of-life-insurance-in-financial-planning/