When it comes to planning for your future and managing income and investment risk to provide for your family, it's safe to say you have a lot of competing priorities. That's why many of today's complex life insurance options are designed to address multiple needs in one contract.
Life insurance not only provides for your family in the event of your death, but many of today's policies offer protection for complex scenarios while you're still alive. Purchasing the right policy for your specific set of circumstances is the key to using life insurance as a defensive risk-management part of your larger financial picture.
Life Insurance Policies
Unlike a term insurance policy - which pays out only upon your death - a whole life policy remains in force throughout your lifetime, provided premiums are paid as specified in the contract.
Whole life also includes a component for accumulating assets, called the cash value. Additional advantages that the cash account of a whole life insurance policy can offer include tax-deferred accumulation over the long term, the potential for dividends, and a guarantee by the claims-paying ability of the issuing company.
Risk Management Features
A carefully structured life insurance strategy can provide a strong risk management component to your overall financial picture as well as emergency cash during your lifetime. For example:
- Life Insurance Protection -- In the event of one spouse's premature death, the beneficiary receives life insurance proceeds and any remaining balance from the cash value account.
- New Home Purchase or College Funding -- You can borrow from yourself with a tax-free loan from the policy's cash value.
- Income for the Future -- A variable life policy with a cash value allows for tax-deferred accumulation of earnings through a diverse selection of professionally managed investment options.
- Retirement Income -- Avoid income tax on policy loans or partial surrenders that are used specifically for supplementary retirement income.
- Long-Term Care -- Some life insurance policies have a long-term care benefit as well as a rider that protects cash values and the continuation of premium payments during periods of disability.
- Portfolio Diversification -- A well-structured life insurance policy can also add diversification to your portfolio to help you manage risk. Whole life policies offer a cash accumulation rate that is not correlated to the securities markets, so you may be inclined to invest other assets more aggressively knowing that you have this guaranteed portion of your portfolio.
Emergency Funds
Policy owners may also be able to tap the cash value as a safety net for emergency expenses. There is no approval process and no collateral required; you may request funds without having to undergo the scrutiny of a bank or credit card. Be aware, however, that when you take out a loan against your policy, it will decrease both the policy's death benefit and cash value by the amount you borrow (plus interest).
If you don't pay back the loan, the amount will be deducted from the death benefit your heirs receive when you pass away. It's important to consider your need for cash today compared to your heirs' need for financial protection should you die unexpectedly.
Of all the pieces in your financial picture, life insurance is considered one of the more complex. There are different types of policies and within each, a vast array of riders and options. However, life insurance may potentially over a viable component of risk management to a well-diversified portfolio. Please call if you'd like to discuss this in more detail.