Apr 8, 2022•5 min
How Life Insurance Provides Financial Protection
Life insurance covers your loved ones in death, but it can also be beneficial while you’re still alive. In fact, a life insurance policy can act as a step to financial protection for you and your family. How? Here, we’ve got all the details about why you should get life insurance for financial protection.
Building wealth with a permanent policy
Your first step to financial protection with life insurance comes with permanent coverage. Unlike a term option, which only lasts for a specific amount of time, perm coverage never expires, and you pay the same premium throughout the entirety of the policy.
There’s also the added bonus of wealth accumulation, which changes the entire dynamic of life insurance and really helps you on your way to financial protection. So, how does it work?
With a perm policy, you pay into two pots: cash value and death benefit. The cash-value element grows each time you pay into the policy and can be accessed later in life. Think of it as a savings account, and you’re not far off. Even better, the cash value in a life insurance policy typically grows by between 6% and 8%, meaning you can enjoy gains and give yourself a nice financial boost while also benefiting from a death benefit should the worst happen.
Life insurance protects your family
If you’re the primary breadwinner in the house and people rely on you to provide, what happens if you’re no longer around? A life insurance policy safeguards your family against financial trouble should you pass away.
The death benefit goes to your spouse and can pay for important things like the mortgage, debts, and general day-to-day living. With a permanent policy, you can think about more than what happens if you die.
That means you can plan for the long term, using the previously-mentioned cash value to safeguard your family’s future–or you can use it in case of a rainy day. Either way, you’re covered, and so are your partner and children.
Riders can cover you should you fall ill
Life insurance policies also come with riders, which are add-ons you can use to customize your plan. One of the most popular riders is the accelerated death benefit. With this rider, you can potentially release the death benefit before you pass away if you become seriously ill.
It also kicks in if you can no longer work due to sudden illness or injury. It’s a smart way to think about financial planning, as your funds could be hit severely if you suddenly can’t work anymore. The result could be more burden and stress on your partner to provide. However, with an accelerated death benefit rider, none of those issues need to become a reality.
Other riders that can help with financial protections include long-term care riders. This offers you care later in life if other people in your family are unable to look after you. As a matter of fact, 70% of individuals will need long-term care at some point in life. They benefit anyone who may need nursing or home care when they’re older and help you save thousands on the costs associated with long-term care.
Can help with debts later in life
A life insurance policy can help with debt should you pass suddenly, with the rest of your family needing to pay the money owed. The payout from the life insurance death benefit can help repay loans and keep the family’s savings secure.
Or, it could be that you incur short-term debt while you’re still alive and don’t have the means to pay it. A permanent policy can also help in such a scenario, as you can draw down the cash value and use it to pay for your debts without having to dip into your retirement funds and suffer early penalties or sell stocks or real estate and incur heavy taxes. While using the cash value to pay for debt might not have been your initial plan, having that financial protection is handy and can save the day if you find yourself in a bind.
Or send your children to college
Then again, you might want to use the cash value to send your children to college. The annual cost of going to college is $35,000, which isn’t the kind of money most people have lying down the back of the sofa.
Unlike 529 plans, which are common for sending kids to college, a perm policy has fewer restrictions on distributions and allows you to keep funds from the federal financial aid methodology.
The cost of sending a child to college adds up quickly. Covering it with the money you’ve accumulated via your perm policy will go a long way to protecting yourself financially, thus ensuring your other finances remain untouched.
Life insurance can reduce income tax
While you can’t claim your life insurance policy against your tax, you can use it in other ways to save on taxes. For starters, a perm policy has tax-free benefits when you build and withdraw your cash value. That means if you’re using your permanent life insurance to supplement your retirement income, the funds don’t count into your income taxes (unlike a 401K or IRA) and can actually help lower your overall income taxes in retirement.
When you release the equity in your cash value, you can do so in the form of a 0% loan to yourself. Now, you can’t pay tax to yourself, which means the loan is tax-free. And when it comes to paying it back, you use the increased death benefit after you pass. What’s left (and it should be a fair amount) is then given to your beneficiaries.
In conclusion: life insurance for financial protection
Using life insurance for financial protection offers benefits both in life and death, thanks to its cash value aspect and death benefit. As a result, you can feel confident about your finances moving forward, taking advantage of factors like tax-free earnings and ensuring that you and your family’s financial situation looks healthy in the present and future. Get a quote today!