When people hear life insurance, often they will almost automatically tune it out. No one wants to think about when they pass away. A lot of people may think it doesn’t matter they won’t be here anyways. Life insurance can do a lot more than paying out a premium when you’re no longer here. It can benefit you and/or your family during your life also. Let’s talk about some different life insurance products and how they can benefit you during your life.
1) Cash Value Life Insurance
Cash Value in life insurance is a feature that is built into most permanent life insurance policies. When you pay for life insurance, you must understand no matter what type of policy it is, some of your premium is going towards the cost of the life insurance. In a permanent or whole life policy, you are paying for a set amount of death benefit, but the remainder of your premium will go towards the Cash Value. That cash value may set in an account and grow at a fixed rate over time. Typically, that rate of return is fairly attractive. As your money is accumulating in cash value, it is earning a fixed rate of return and its also growing tax deferred. A strategy you can use with cash value life insurance is to overfund it, which is basically put in more than is required to maintain it. When you overfund your permanent policy, more of your money will go towards the cash value, which means more of your money is growing at a fixed rate tax deferred. If you’ve had this type of policy for several years and you need some money down the road for an expense such as a wedding for your daughter, maybe college, or maybe an emergency, you can access the cash value either by taking a withdrawal, or better yet a loan on your policy. When you take a withdrawal, this creates a taxable event, but if you were to take a loan on your cash value, this is not taxable. You can choose to pay it back over time, or you can not pay it back, let the remaining cash value keep growing and when you do pass, the policy will net the loan out of the death benefit. You can use cash value to be your own bank to fund specific future expenses or just have it as an emergency fund if you need the money. This is how cash value life insurance can be used to your benefit while you are living.
2) Long Term Care
One of the most expensive costs during retirement can be long term care costs. If you are unable to take care of yourself, you may need an assisted living facility or you may have to go to a nursing home either short term or permanently. These costs can be quite expensive and may deplete your retirement nest egg very quickly leaving nothing to go to your family or to take care of yourself. If you have a life insurance policy with a Long Term Care Rider, you may be able to access a significant amount of that death benefit during your life to help take care of you while you are in an assisted living facility or nursing home. Some advantages to having life insurance with Long Term Care riders is that typically the qualification to receive the benefits is not as strict as a traditional Long Term Care policy. You may also be able to access these funds for services that a long term care policy may not allow. Additionally, you would still have a death benefit of the remaining funds you did not use, so your life insurance would help you cover costs during your life and still pay out to your beneficiaries the remaining amount.
3) Cash Back Term
Cash Back Term insurance is kind of a hybrid of term and whole life. In a traditional level term policy, you pay a specific premium for a certain number of years, and at the end of that term you can let it expire or convert it to a whole life policy usually for a higher premium since it would be based on your future age when you convert it. The main rub most people have with term insurance is that at the end of the term, you don’t have anything to show for it. Even though premiums are typically very low, you do not see any benefit after the initial term expires. With Cash Back Term, your premiums will be a little higher than level term, but what happens at the end of the initial term is that you can choose to get all of your premium back to you in a lump sum payment, you can let that cash value buy paid up permanent insurance that you will not owe anything on the rest of your life, or you can do a combination of the two. I think cash back term is a great way to cover specific needs during the initial term period, then it can cover a planned cost in the future. In my opinion, this is the perfect college fund. When your child is born, set up a 20-year cash back term policy. Base the death benefit on how much you would need to cover your mortgage or your income if something were to happen to you prior to your child going to college. When the 20-year mark hits, your child should be in the middle of college. You can take the cash back and use it to pay off student loans or pay towards the remainder of their college.
4) Tax Free Retirement Income
Wouldn’t it be great if there was a way to get tax free retirement income while still having life insurance to go to your family tax free? This one can be a little more complicated, but it is a very powerful tool to help you supplement your retirement while still offering a death benefit. This product is called an Accumulation Indexed Universal Life policy (IUL). You have a similar concept as the cash value whole life, but in an IUL, your money is linked to different stock market indexes. They usually have a cap on the upside but on the downside, your worst case is you don’t make anything in years the market does poorly. The money you are overfunding this IUL with is growing tax deferred and is linked to different market indexes, so your growth may be much more significant than your cash value whole life policy’s fixed rate. This product will grow over time, tax deferred and when you need it in retirement, you can take policy loans out to supplement your income. Since you are taking a loan on the policy the full value is left in there to grow based on the indexes its linked to. The growth of the cash value may be able to support multiple years of retirement income before deteriorating the underlying cash value. This strategy can provide you with several years of retirement income tax free if utilized properly. Additionally, your death benefit will be greater than you cash value, so it continues to grow over time with your cash value and when it pays out, it will net out the policy loans to still leave a death benefit to your beneficiaries.
5) Accelerate Death Benefit
One more benefit we will discuss is the Accelerate Death Benefit. This may not be quite as attractive as some of the other benefits and strategies that we have discussed, however, it is something that is often overlooked. Accelerate Death Benefit is a rider that allows the owner to access the death benefit if they have become terminally ill. This can be used to help pay for ongoing medical expenses, maybe long-term care costs, or maybe it gives the insured the ability to help get some of their financial affairs in order before their passing for their family members. Typically, the insured would need to be diagnosed with a terminal illness and be expected to live no longer than 12 months from that date to qualify to access most of these riders. This benefit could help ease your families’ financial burdens in the last year or your life. It may give the insured the funds to take that trip they never were able to during their lifetime. It can provide a sense of relief in many scenarios, and it is a benefit I would highly recommend adding to your policy if possible.
Please note that Cambridge does not offer life insurance.