As many of my clients remind me, life insurance is one of the most complicated financial topics. However, most people do recognize the need to invest in a life insurance policy as security and protection for family members. The devil is in the details, and if you don’t take the time to understand the fine print, you won’t get the policy you deserve.
One of those often overlooked details is living value. Most people think of life insurance as a way of receiving funds to help replace income when the primary earner passes away. This death benefit is one of the most prominent features of life insurance plans.
However, there are different types of life insurance policies. Some policies are permanent life insurance—which means they offer a path for cash to accumulate and function similar to a savings program. The funds from a permanent plan can be used to help pay for your children’s education or as the supplement to many other financial objectives. Because the funds offer a benefit while the policy owner is still alive, and don’t only benefit the life insurance beneficiary, the plans have “living value.”
The cash value of a permanent plan is tax-deferred, which means you'll only get taxed on it when you make a withdrawal. However, you can access the cash value tax-free by taking out policy loans. The loan interest is almost always stated in the policy plan and tends to be equivalent to market-wide lending rates.
You can also contribute to a permanent life insurance plan after the age of 70, which makes it different than other savings plans, like a traditional IRA. You also don’t have to make a mandatory withdraw after 70, so you can keep accumulating cash assets on a tax-deferred basis.
Life insurance is multi-purpose; it can provide financial compensation in the event of death, or it can be used to grow your financial portfolio while you’re alive. By understanding the purpose it serves, you and your financial planner can see if a permanent life insurance plan fits into your personal financial planning goals.
For more information on life insurance, go to my Resource Library. You'll find additional articles to help you understand the details.
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Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.