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The concept of goal-based financial planning isn’t new. Diversification isn’t either. We all know that life insurance has traditionally been utilized as a risk management tool to assist with income replacement during your working years. However, life insurance is a vital component of a well-rounded financial strategy. It’s critical to first define your objectives, then look at the life insurance options available to assist you achieve them.
While there are more than six ways to employ life insurance in comprehensive financial planning, the six listed below are by far the most common, especially in light of possible tax law changes.
Income Substitute
The main reason most individuals get life insurance is to replace their income so that their loved ones can continue to buy things and stay in their homes.
Income replacement is especially critical if you’re in your prime earning years, which are between the ages of 35 and 55. While there is a low likelihood of death during those main earning years, there is a tremendous level of pain if death does occur.
In the event of an early death, your loved ones would have a lot to deal with, both emotionally and financially. Worrying about how to pay the mortgage and cover funeral costs should not be on the list.
College Preparation
Another way to use life insurance is to buy a policy and use the cash value to pay for college. However, if you go this path, you’ll need a long runway or a high rate of return in order to save enough money to pay for school.
ADDITIONAL INFORMATION FOR YOU
If you go with this technique, the cash value of your chosen policy isn’t included in your anticipated family contribution (EFC) for financial aid purposes, so you might be able to get some extra support from student loans or grants.
On the negative side, growth may take considerably longer than it would in a 529 investing portfolio. It’s critical to consult with your financial advisor to ensure you’re employing the most appropriate approach for your circumstances.
Preparing for Retirement
Although life insurance is not an investment, it does provide a means of saving. Consider life insurance as a third bucket, similar to how you contribute to your 401(k) or Roth IRA. Life insurance is a conservative part of your investment portfolio that allows you to invest money tax-free, and unlike other vehicles, you have complete control over the flexibility and options.
You can draw out a tax-free income over time to enhance your retirement if your plan is properly set up and funded.
Tom Hegna, a retirement income expert and author, said he’s put some of his own money into cash value life insurance as a tax-free source of income in retirement.
“Every year, I believe tax-free income in retirement will become more essential,” Hegna added.
Life insurance can also be used to supplement retirement or Social Security income. Finally, it can be used to pay for long-term care. Many current policies even include long-term care coverage.
Diversification of taxes.
Taxes will have to rise, according to Hegna, in order to cover unmet liabilities like as Social Security, Medicare, Medicaid, and government and military pensions.
The cash value of a life insurance policy with a cash value increases tax-deferred within the contract, and beneficiaries receive federal income tax-free payments. Older cash-value contracts that aren’t functioning well can be exchanged for a newer insurance tax-free under Internal Revenue Code 1035.
Business Requirements
Using life insurance and buy-sell agreements in the early stages of the business can assist secure its survival. You want to make sure that the business is passed on to those who are interested in it, whether you have two or more partners.
Preparing a Will
We all have a will. The purpose of employing life insurance in estate planning is to ensure that your estate is passed on quickly and in the manner that you choose. There will always be costs associated with settling an estate. Some of those expenses and estate charges can be covered by life insurance.
“While wealthy people may think they don’t need life insurance in the classic sense, they do need a mechanism to transmit wealth to their family in the most effective way possible,” Hegna explained. “You may transfer big quantities of money for pennies on the dollar using life insurance.”
To reduce estate taxes, another option is to use an irrevocable life insurance trust. Along with that, it’s critical to be informed about potential changes in estate taxes, which will be a hot topic in the coming 18 to 24 months.
It’s critical to consider how life insurance can help you achieve your objectives as part of a comprehensive financial plan. If you’re not sure how to accomplish it, seek assistance from an expert./nRead More

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