6 Key Uses of Life Insurance in Financial Planning

Mar 23, 2022

Life Ins

6 Key Uses of Life Insurance in Financial Planning

Diversification and goal-based financial planning aren't new ideas. Historically, life insurance has been used as an income replacement tool that helps protect your loved ones financially if you pass on unexpectedly. However, life insurance can also be an essential component of a comprehensive and diversified financial plan. Therefore, it would be best if you first established your financial goals and then consider the various life insurance options to help you attain your aims. While there are many more ways to utilize life insurance in Bristol, CT, here are six uses in financial planning.

  1. Income Replacement

    The common reason why most people carry a life insurance policy is income replacement. Life insurance provides financial protection to those who rely on your income. Incomes replacement is especially important for people in their core earning years (between 35 and 55). While the risk of death is lower during this period, your dependents are likely to face a more severe financial and emotional devastation following your untimely death. Your loved ones will not only be emotionally impacted, but they may also have to worry about funeral expenses, mortgage, and more.

  2. College Planning

    Life insurance can be part of college planning. You can use a life policy's cash value to pay for college. However, this option will only work if the rate of return is high or the term period is long enough for you to accumulate enough cash to cover tuition. Also, with this option, your policy's cash value won't be included in EFC (expected family contribution) during financial aid consideration. Therefore, you may get additional financial help from grants and student loans. However, the growth may take much longer, so you should consult a financial advisor before taking this route.

  3. Retirement Planning

    Life insurance can have a savings component. Your life insurance can serve as another bucket, in addition to your 401(k) or Roth IRA, where you can put retirement funds. In addition, life insurance can be the conservative component in your investment portfolio. The funds you put into your policy are tax-deferred, and unlike other investment vehicles, you can control your options.

    If properly funded and structured, you can supplement your retirement income by taking out tax-fee income from your policy. You can also use life insurance to substitute your Social Security and pension income. Many modern life policies also offer long-term care benefits.

  4. Tax diversification

    Due to underfunded obligations like military and government pensions, Medicaid, Medicare, and Social Security, the government may increase taxes. However, your cash value is tax-deferred with a life policy with cash value. Furthermore, the Internal Revenue legislation allows for older policies with underperforming cash value to be exchanged for newer ones tax-free.

  5. Business Needs

    Upfront buy-sell agreements and life insurance can help ensure the sustainability and continuity of businesses. For example, if a partner dies, retires, or is incapacitated, life insurance can facilitate the transfer of business ownership without draining the business' capital.

  6. Estate planning

    Life insurance can help you pass your estate efficiently. Many expenses come with an estate, and a life policy can provide cash to pay for these estate charges. You can also use an ILIT (Irrevocable Life Insurance Trust) to reduce estate taxes.

It would help if you strived to understand how to use life insurance to craft a comprehensive and diverse financial plan that meets your goals. Contact us at C.V. Mason Insurance Agency for a life insurance policy that will help you achieve your financial goals.