With only a few days left in NAIFA’s Life Insurance Awareness month, I wanted to write about how life insurance fits into a financial plan. See, financial plans aren’t just about money, they’re about accomplishing all the goals you (and your partner if you have one) have set for your life. I’ve said it before, but most of those goals have a financial aspect to them – it could be that they cost money (ex. goal = buying a vacation home); it could be that they require you to have financial freedom (ex. goal = taking 3 months off work each year to travel). Whatever your goal, it generally requires some financial consideration.
Life Insurance as Peace of Mind
When we’re discussing life insurance and how that fits into your financial plan, it becomes a conversation less about your goals in life and more about your goals in death. Bear with me here, I know it can sound a bit morbid at first, but there’s a massive amount of peace of mind that comes with life insurance.
As a father of three, I am constantly imagining the future of my children. Whether it’s how I’m demonstrating behaviors, the education they’re receiving, or the healthy meals my wife cooks for the family, the future and well-being of my children is always on my mind. And believe me, in my idea of their future, I’m always there! I get to see them grow and have success and become incredible people.
But if by some twist of fate, I’m not present in their future, I don’t want it to look any different than I’ve imagined. I’d like my wife to carry on raising our children just as we had imagined and not have to struggle to do so. The best way to do that is having life insurance as part of our financial plans.
Life Insurance as Tax Planning
Of course, with a sound financial plan, there may come a time when you’re able to self-insure. This would mean your assets are at a level which outweighs your need for insurance. While this is a beautiful place to be in life, there can still be other reasons to carry life insurance.
Often when your assets have amassed values which alleviate your need for insurance, it can mean your heirs will have a significant tax burden when you pass. I know, I know – “rich people problems,” right? But you didn’t work so hard for so long to leave a legacy, only to have over half of it consumed by taxes. That’s right! Depending on the value of the account, retirement plans can see as much as 70% of their value end up in the government’s hands.
Life insurance can serve as tax planning for your heirs to retain more of the wealth you so generously left them. When the death benefit of life insurance is received by heirs, it’s tax free. This means they can offset the taxes on other assets received and end up with the amount you had planned for them.
Life Insurance as Retirement Income
As counter intuitive as it may seem, life insurance can reap benefits even while you’re alive. Some permanent life insurance policies can be structured in a way that allows for withdrawals and/or loans on the Cash Value of your policy which can be used as tax-free income in retirement. Maybe discussing life insurance isn’t as morbid as you had originally thought, yeah?
This method of utilizing life insurance has many moving parts and shouldn’t be implemented without consulting several professionals (Financial Advisor, CPA, tax professional, etc.). If done properly though, the method can add thousands to income in retirement and save on taxes when it lowers your taxable income.
So, What’s Right for Me?
With the many uses of life insurance in a financial plan, I highly recommend consulting a professional financial planner who has a process in place to review your goals and strategically plan to accomplish them. Your life insurance needs will change throughout the span of your life and subsequently your financial plan, and a proper advisor will help you navigate those changes.
My planning process, The Custom Wealth Architect, not only plans for and addresses these changes in your initial financial plan, but with the annual check in, The Custom Wealth Inspection, we’re able to address any unforeseen changes as well. If any of this post has sparked a question or piqued your curiosity, feel free to reach out to us at any time!