Life Insurance: Understanding Its Applications and Benefits
If you are a working professional, you have likely been presented with the question of whether or not to get life insurance. Many employers offer group term insurance, but you may wonder how much you need and what type of insurance is best for you. While traditionally, people think of life insurance as a way to protect loved ones financially in the event of their death, it can also be used as an investment vehicle and estate planning tool.
If someone depends on your income, you likely have life insurance as a protective measure in the event of your death and income loss. Whether this is a spouse or child, it is important to understand what their expenses would be in the event they couldn’t rely on you financially. This will help to determine the amount of insurance that makes sense to obtain. In addition, you should take into account assets outside of life insurance that could be relied upon to fund expenses in the event of your death as this could reduce the amount of insurance you need. Perhaps you have an investment account that is designated for this purpose and would be sufficient today. Understanding your financial trajectory is key for planning for the right amount of insurance.
In addition to being a protective measure, life insurance can also be used as an investment vehicle. Depending on the kind of insurance policy, insurance can have a guaranteed minimum rate of return and accumulate a cash value. While solely having life insurance as an alternative to investments in the stock market may not make sense, this can be a great supplemental savings vehicle. For example, a variable universal life policy accumulates cash value that can later be paid out or be available for the policyholder to take a tax-free loan out against the policy. For those more prone to spend than save, this can also be a great forced savings vehicle.
As you might imagine, life insurance can also be a great wealth transfer tool. Upon your death, the policy pays out a tax-free benefit to you loved ones. In some cases, this can also be outside of your estate. For example, an Irrevocable Life Insurance Trust (ILIT) is a popular vehicle for those potentially facing estate taxes. Life insurance owned in this type of vehicle can be helpful as you can put guidelines within the trust on how the life insurance proceeds are to be used by your heirs. Typically, these funds will be used to pay for any funeral expenses and estate taxes with the remainder funneling to heirs under specific guidelines through the filter of a trustee.
Life insurance is a great tool to consider when thinking about your financial well-being. To understand what kind of insurance is right for you, it’s important to understand your financial future. At Heritage Wealth Architects, we pride ourselves on being fiduciaries. We work with clients to fit insurance products into their financial plan, only when it makes sense, and in a way that mitigates risk and safeguards their financial futures. Please reach out to our team today with any questions.