Life Insurance and Financial Planning – How Do They Tie In?
~ By Herb White, MBA, CFP ~
When it comes to finances, many people believe that financial planning and life insurance are as unrelated as night and day. Their thinking is that financial planning is concerned with investments, taxes, retirement and estates, while life insurance is only for providing a “death benefit.”
Yet, life insurance can play a significant role in one’s personal financial planning—and together with other forms of insurance such as disability and long-term-care insurance, can even form the underpinnings of that plan. Called “risk management” or, simply, insurance planning, it can be a valuable tool to help achieve your financial goals.
Although the investment portion of a retirement or estate plan is typically comprised of stocks, bonds and/or funds — insurance can be used as a tool or strategy for those plans as well. For example, some types of life insurance policies, such as whole life and universal life, may include a savings component. These types of insurance policies have the potential to build up a cash value that can be withdrawn tax-free.
Because of the additional tax advantages available on these types of cash-value life insurance policies, some individuals use them as tools to supplement retirement income, pay off large debt like a mortgage, or fund a child’s or grandchild’s college education.
Let’s explore various types of life insurance.
Term life insurance, provides a death benefit and is what many people commonly think of when they consider life insurance. Although the premiums are considerably less than the premiums for whole life insurance these policies may lack an important financial planning component. Also, there are some additional drawbacks to consider when purchasing term insurance. To remain in force term insurance must be renewed at a set time; for example ten years, and the cost of premiums will increase at each renewal. Term insurance policies will not build cash value and usually become cost prohibitive as you get older often resulting in no insurance coverage as you reach life expectancy.
Whole life insurance, on the other hand, provides coverage for individuals who are concerned about long-term goals and financial planning in addition to having a death benefit. With whole life, you typically have level premiums and can accumulate cash-value that may result in a substantial amount of tax-deferred savings over time. This type of life insurance can also be a source of tax-free cash that you can access from the policy via policy loans. Whole-life policies come in several varieties, including:
- Universal-life policies. These offer flexibility in the payment of premiums, death benefits and savings. They are often selected to augment and fit in with your financial plans, because they have the potential to a return on the accumulated cash value.
- Variable-life policies. These policies can also offer flexibility in premium payments as well as provide you with more control over your policy’s cash value. The cash value can be invested in the investment choices within your policy. Be aware that the cash values and death benefits will be affected by the performance of your investment choices—that is, rising and falling with your investments. In addition, fees on these variable life policies are generally higher than with universal life policies.
It’s easy to see how whole-life policies may bolster a retirement plan or help with college for the children or grandchildren. But are they right for you? They are complex and, as with all decisions regarding your personal finances, require research before jumping in. Your financial advisor or insurance advisor will be able to help.
Tune in to “America’s Wealth Management Show” sponsored locally
by Life Certain Wealth Strategies
Saturdays from 12 noon to 1 p.m. on news radio 630 KHOW.
Provided by courtesy of Herb White, MBA, CFP©, a CERTIFIED FINANCIAL PLANNERª with Life Certain Wealth Strategies, 8400 E Prentice Ave, #715 Greenwood Village, Colorado, www.lifecertain.com, (303) 793-3999. Securities and investment advisory services offered through Woodbury Financial Services, Inc. Member FINRA, SIPC and Registered Investment Advisor. Life Certain Wealth Strategies and Woodbury Financial Services are not affiliated entities.