Why should you own permanent life insurance? By Roger Madison, Investment Advisor Representative.
One of the greatest questions I have ever been asked is, “If you knew something that you believed to be true wasn’t, how soon would you want to know about it?” Pretty soon was my reply. Well, for those of you who believe that the only approach to life insurance is the oft quipped “Buy Term – Invest the Difference”, pretty soon may be right now!
I have been working as a financial advisor for nearly 15 years now and believe that a strategic, balanced portfolio is the key to long term financial success. This portfolio should generally include protection of various types of insurance for life’s major surprises and setbacks, bank savings for short term needs and emergencies, intermediate investing things like for college and weddings, and long term planning for retirement, tax efficiency and wealth transfer. Portfolios built in the order mentioned above are more likely to provide long term success for one simple reason, longer term savings and investments are less likely to be sacrificed for shorter term needs and potential liquidation at a time of loss or diminished value.
Let me explain with a couple of examples and a statement. First the statement, the need for life insurance doesn’t end for most people at retirement or at a specific age!
1. Many people at retirement have not paid off their mortgage. Since many folks rely on their employer for their term life insurance, they are left without life insurance at a critical time. Even folks who purchased term life privately, run the risk of their term insurance expiring or becoming too expensive at the moment they need it most. Permanent insurance addresses this problem because it never expires. For example, funds from the life insurance’s cash value in the form of a withdrawal or a policy loan could be used in this case to pay off some or possibly all of the mortgage (solving the short term need) and preserving assets that were meant for long term planning and needs.
2. Death of a spouse can cause a loss of income and a potential increase in income taxes. Many of today’s retirees are retiring with a company pension and that pension comes with a choice. Do I maximize my income by taking a life only benefit or reduce my income and take a joint benefit? This choice can lower a person’s income in retirement and may result in disappointment if the non-pensioned spouse dies first! This same challenge exists with social security and married couples. A surviving spouse will experience a decreased income as the smaller of the two social security payments will end on the death of the deceased. In either case, the death of a spouse will likely result in the surviving spouse having less available tax deductions as a single filer. The expenses typically don’t decrease at the same rate of the income. Permanent insurance addresses this because it never expires. Funds from the life insurance’s cash value could help cover the lost income and potentially could be available in a more tax favored way.
3. Death at any time will result in expenses to the survivor. One commonality for all of my clients that have experienced the death of a spouse or child is the need for liquidity. There are a variety of costs that come with the loss of a loved one; final medical expenses, funeral arrangements, memorials, charitable funding and probate costs are a few. Permanent life insurance addresses this problem because it never expires. Having life insurance in place at time of death can make covering these costs much easier to manage and can save the surviving spouse money. Without life insurance, the survivor may be forced to liquidate investments that could have surrender penalties or be subject to taxation. This liquidation could cause the survivor to experience a decrease in their standard of living.
Withdrawals and loans from a life insurance policy reduce the life insurance policy’s death benefit and cash value. Life insurance is not a retirement plan, investment, or savings account.
Permanent life insurance remains inforce as long as the required premiums have been paid. Guarantees are subject to the claims paying ability of the issuing insurance company.
Neither OneAmerica Securities, AUL, Allegis Financial Partners, nor their representatives provide tax or legal advice. For answers to specific questions and before making any decisions, please consult a qualified attorney or tax advisor.
Provided content is for overview and informational purposes only and is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice.