The Most Overlooked Value of Life Insurance
I recently met with a hard-working, bright and successful couple via video conference. I’ve gotten to know them more intimately over the past year or so since they became my clients after her father, who was my client, passed away. Her father’s investment portfolio and estate had some complexities that took some time to work through so that we could prudently position the assets favorably for their circumstances. In conjunction, we’ve been deeply examining their personal finances, projecting retirement, reviewing their estate and analyzing their assets.
Years ago, this couple put a combination of both term and permanent life insurance policies in place. They have a large amount of death benefit that served the purpose of income replacement in the event of premature death. At the time of purchase and for years following, it made sense to them to overfund their permanent policies. To “overfund” means exactly how it sounds: funding over, or in excess of the amount that is required to support the policy’s death benefit. This strategy is intended to build cash value inside the policy, which their insurance agent had explained that they could then use as net loans in retirement. Following the IRS rules would allow them to use some of the cash value from the policy in retirement in a tax-favored manner.
Life changes. Perspectives change. They had told me that a priority for them was to leave an inheritance for their children, and someday, they may have grandchildren. We looked at a detailed in-force illustration for their life insurance that their agent had provided. We saw how taking money out of the policy reduced the death benefit disproportionately. We also discussed their money outside of the insurance policy, looking at the whole picture. What was evident to me was that we may be able to accomplish tax-advantaged strategies outside of the life insurance policy and preserve the cash value inside of a life insurance policy, whether they keep this one or we pursue another. Keeping the cash value of the policy provides leverage, buying the death benefit which can guarantee an inheritance for their children. In other words, a dollar of cash value buys more than a dollar of death benefit for their beneficiaries to inherit income-tax free from a life insurance contract. A dollar in any other investment equates to a dollar of inheritance for their beneficiaries, and if taxable, reduces the net received. Further, their assets outside of life insurance are intended for their own retirement spending. If we leave the insurance for purposes of insurance, we can with more predictability and efficiency, fulfill their intentions.
The leveraging of dollars, whether through the premiums paid or the cash value accumulated, that buys the life insurance death benefit can sometimes be the most overlooked value of life insurance.
LouAnn Schulfer of Schulfer & Associates, LLC Wealth Management can be reached at (715) 343-9600 or louann.schulfer@lpl.com. SchulferAndAssociates.com , louannschulfer.com or louann.biz
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.
