Imagine having a financial safety net that not only helps to secure your loved ones’ future but could also offers you significant benefits while you’re still alive.
A life insurance policy could do just that.
It’s more than just a contract between you and an insurance company; it’s a versatile financial tool. By paying regular premiums, you could ensure that your designated beneficiaries receive a sum of money upon your death, covering crucial expenses like funeral costs, debts, and daily living expenses.
But here’s the twist: life insurance isn’t only about end-of-life planning. It could also provide financial advantages during your lifetime, such as tax-free cash flow during retirement, funding for your child’s education, and even living benefits for unexpected health issues.
Curious about how a life insurance policy can benefit you now and in the future? Keep reading to discover the full range of its financial perks.
What is a Life Insurance Policy?
A life insurance policy is a contract between an individual and an insurance company where the insurer promises to pay a designated beneficiary a sum of money upon the insured person’s death. In exchange, the policyholder pays regular premiums to the insurer. Life insurance policies provide financial security to beneficiaries, helping to cover expenses such as funeral costs, debts, and living expenses, ensuring their financial well-being after the policyholder’s death.
6 Common Types of Life Insurance Policies
- Term Life Insurance: Provides coverage for a specific period, such as 10, 20, or 30 years. It pays a death benefit if the policyholder dies within the term but has no cash value component.
- Whole Life Insurance: Offers lifetime coverage with a fixed premium and includes a cash value component that grows over time. It provides a guaranteed death benefit and can serve as an investment.
- Universal Life Insurance: Provides flexible premiums and death benefits, with a cash value component that earns interest. Policyholders can adjust their coverage and premiums based on their needs.
- Variable Life Insurance: Includes a cash value component that can be invested in various sub-accounts, similar to mutual funds. The death benefit and cash value can fluctuate based on the performance of these investments.
- Indexed Universal Life Insurance: Combines the features of universal life insurance with an interest crediting strategy linked to a market index. It offers potential for higher cash value growth based on market performance.
- Final Expense Insurance: Designed to cover funeral and burial expenses. It is typically a whole life policy with a smaller death benefit aimed at covering end-of-life costs.
These policies cater to different financial needs and goals, providing options for both short-term protection and long-term financial planning.
When Should You Purchase a Life Insurance Policy?
You should consider buying life insurance at various life stages or when certain personal and financial circumstances arise:
- Starting a Family: When you have dependents such as a spouse, children, or other family members who rely on your income, life insurance can provide financial security for their future.
- Getting Married: Marriage often brings shared financial responsibilities. Life insurance can help your spouse is financially protected in case of your untimely death.
- Buying a Home: If you have a mortgage, life insurance could help cover the remaining balance, helping your family can stay in their home without financial strain.
- Having Children: To secure funds for your children’s education, childcare, and other expenses, life insurance could provide peace of mind and financial stability.
- Career Changes: With an increase in income or a new job, reassessing your life insurance needs providing that your coverage matches your financial contributions.
- Aging Parents: If you are responsible for elderly parents, life insurance can help cover their care expenses and ensure their well-being.
- Health Changes: Buying life insurance while you are young and healthy could secure lower premiums, as rates typically increase with age and potential health issues.
- Business Ownership: If you own a business, life insurance can be used to protect your business partners, cover business debts, or facilitate a smooth transition in case of your death.
Overall, buying life insurance is a proactive step in financial planning, with the goal of providing security and peace of mind for you and your loved ones at various stages of life.
4 Ways to Benefit From Your Life Insurance Policy
You’ve shopped around for whole life insurance and have found a policy that yields the best benefits for your family from funeral preparations to aiding in supporting them for years to come. However, you may not be aware that there are some ways you can reap the benefits of your life insurance policy during your life as well.
You don’t have to simply consider end-of-life benefits regarding your life insurance policy. Here are four ways you can utilize the quality advantages of your life insurance policy during your lifetime to benefit your family and help you prepare for the next stage in your life.
1. Minimize Taxes in Your Retirement
A whole life insurance plan can be used as a tax-free form of cash flow during retirement. Policyholders can utilize their life insurance similar to a personal pension and make withdrawals tax free while in retirement. In this way, your life insurance policy operates like a retirement savings account in which you can use it to generate cash flow during retirement.
2. Use to Fund Your Child’s College Tuition
Your whole life insurance policy could benefit your future generations sooner than you think. Potentially, your life insurance policy could yield better rates when taking out a loan for your child’s (or your own) education than an actual student loan. And when it comes to paying back the interest, the money goes right back into your policy.
Additionally, your life insurance can also cover your student loans should any debt exist when it goes into your estate. Should your estate contain any student loan debt, your life insurance coverage can cover the tax placed upon your debt.
3. Explore Living Benefits
When the least expected occurs, your life insurance policy can function as additional cash flow support through living benefits. Living benefits can be used as a portion of the death benefit to be used in certain situations. This way, the death benefit is not entirely used during your life but policyholders can still rely on the added financial support of life insurance benefits during your life.
Living benefits can provide financial assistance in the form of chronic illness benefits in which you can receive aid in various activities including dressing and eating. Terminal illness benefits are also available through your life insurance policy for those who have been certified by a physician. Those needing financial support for medical care during their life expectancy that is shorter than 12 months can use their life insurance policy for living benefits.
4. Sell It Should You Outlive Your Policy
Believe it or not, outliving your life insurance policy is a possibility. If this should be the case for you, when your policy term ends (and if you have never made a claim), your insurance company could return the premiums you have made towards your policy (if you have whole life insurance – of course, you always want to check on the specifics of your individual policy). Once received, you have the ability to use them as you see fit, including investing the funds or saving them.
Outliving your life insurance could be considered one of the more unexpected benefits of your policy. Policyholders have the option of continuing coverage, receiving the funds in a tax-free savings account or taking out loans against it. Depending on your financial needs when your term ends, the opportunity to receive a payout from your life insurance policy is another way to benefit from your policy during your life.
Let’s Unlock the Potential of a Life Insurance Policy
A life insurance policy is more than just a posthumous financial safety net; it’s a dynamic financial tool that could provide substantial benefits while you’re still living. From securing a tax-free retirement income to funding your child’s education and offering living benefits in times of need, the advantages can be numerous and impactful.
By understanding the different types of policies available and the optimal times to purchase them, you can make informed decisions that align with your financial goals and life stages.
If you’re ready to explore how a life insurance policy could enhance your financial planning then book a free financial assessment with Riverbend Wealth Management today.
Our team of financial advisors will help you understand your options.
Frequently Asked Questions
How soon can I borrow from my life insurance policy?
You can typically borrow from your life insurance policy once it has accumulated sufficient cash value, which usually takes a few years. The exact timing depends on the terms of your policy and the amount of premiums you have paid.
What is a whole life insurance policy?
A whole life insurance policy is a type of permanent life insurance that provides coverage for the policyholder’s entire lifetime, as long as premiums are paid. It features a fixed premium, a guaranteed death benefit, and a cash value component that grows over time, which the policyholder can borrow against or withdraw.
What is a term life insurance policy?
A term life insurance policy provides coverage for a specific period, such as 10, 20, or 30 years. If the policyholder dies within this term, the designated beneficiaries receive a death benefit. Term life insurance has no cash value component and typically offers lower premiums compared to permanent life insurance policies.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties.
Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
