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Life Insurance: The Multipurpose Asset



September is Life Insurance Awareness month and this vital asset has tremendous potential to boost your financial plan.


Life Insurance has been called the “Swiss Army Knife” of financial planning, but just like the knife, a lot of people don't know exactly how to utilize the various benefits of this vehicle.


Here are the top six most popular uses for Life Insurance:


1. Income replacement: If you were to pass away during your earning years, you’d most likely leave your loved ones in a difficult financial position. Often, this is the only reason people consider purchasing life insurance. The type of life insurance that most utilize for this purpose is called “term” life insurance.


2. College planning: Did you know that if you have a cash value life insurance policy, you can actually leverage the cash value in that policy to pay for your student tuition? Did you also know that a cash value life insurance policy that you’d leverage for college tuition doesn’t count against your Earned Family Contribution (or EFC). The EFC is the index number that is used to determine how much aid you are eligible to receive from things like grants, scholarships, or possibly financial aid. If you move forward with this type of life insurance, you’ll want to work with a financial planner to make sure you have the proper policy in place to meet these requirements.


3. Retirement planning: I want to make it clear up front, life insurance is not an investment. It’s simply another savings component that you can utilize in your overall financial plan. When you create your plan for future income, you want to look at making sure you have some money in each of the three major “buckets.”

  • Taxable

  • Tax-deferred

  • Tax-free

Cash value life insurance is an asset that fits into the tax-free bucket. It is generally underutilized but can offer some incredible benefits for retirement savings.


4. Tax diversification: Did you know that within the tax code, there are rules that have been specifically designed for life insurance that a lot of other vehicles don't have?


For cash value life insurance, the premiums that you contribute into your policy are contributed and then grow tax deferred. If you choose to take a policy loan from your policy, when you get that money, it's completely income tax-free. If you were to pass away, the death benefit that would be paid to your beneficiaries is also income tax-free. If you want to replace your existing policy, you can even take the cash value from that policy into the new one completely tax-free.


There are actually quite a few tax advantages with life insurance.


5. Business needs: A major concern for business owners is to make sure that their employees are being paid and that their businesses will continue to live on through every season. If you have a business with one or multiple partners, and one of them passes away, it's really important that the other business owners are able to continue to keep the business going and so oftentimes what people will purchase what is known as the buy-sell agreement.


6. Estate planning: Most people want to make sure that, after all the work they’ve done to build their estate, they can transfer it in the most tax-efficient way possible. Life insurance actually provides a great deal of liquidity after death. This allows beneficiaries to pay for any expenses for the estate, as well as potentially any estate tax.


Getting a properly structured life insurance plan can bring your financial planning to the next level. Many people don't realize how many benefits exist inside of these vehicles. As always, if you have any questions, please reach out.

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