Whole Life Insurance Tips
There is a lot of confusion about "whole life insurance" and whether it's worth the extra money. A whole life insurance policy can be a great investment, but only if you fully understand how it works and what the pros and cons are. Here are some helpful tips for whole life insurance so that you can decide if this type of policy is right for you.
Understand Your Insurance Needs
If your earnings don't depend on your physical health, then there may not be much need for catastrophic-only coverage or disability income protection. If, however, your occupation is tied to your physical health - like an athlete - then these types of coverages are likely more important to protect against risk.
Lifestyle Changes That Can Affect Premiums
If you're covered by whole life insurance, then you should know that any changes in your living situation can have an effect on your premiums. If you're moving with your family, then this will increase the amount of coverage you need. And if you are going from owner-occupation to rental or from rental to owner-occupation, this too may have a big effect on premiums.
#1 Benefit - Income Protection Coverage
Whole life insurance can provide income protection and disability benefits that aren't offered by other consumer products, such as term insurance. If you can't work because of illness or injury, you can purchase a policy to pay your living expenses until you are able to return to work. If you are disabled, whole life insurance provides income protection in the event that you lose your income from working.
#2 Benefit - Peace of Mind
Many people get whole life insurance as a way to protect their loved ones in case of a terminal illness. But having this type of coverage also protects your financial security by providing an insurance policy in case something unexpected happens, such as the sudden and complete loss of your livelihood due to a divorce or death.
#3 Benefit - Diversification of Investments
The biggest reason for getting whole life insurance is to diversify your investment portfolio. When you get a whole life policy, you pay a premium - which equals about three percent of the face value of the policy (or your entire net worth) and lock in an amount that is unlikely to change over time. So in effect, you are saying "I am committing to invest all of my retirement savings in this company" (whole life insurers).
#4 Benefit - Lump Sum
Whole life insurers generally provide a lump sum death benefit as part of the policy. This can be a massive advantage in terms of estate planning because it eliminates probate.
#5 Benefit - Tax-Free Cash Value
Another advantage of whole life insurance is the accumulation of cash value. The cash value can be used tax-free for any purpose including retirement, your children's college expenses or to pay off debts such as a mortgage. Some people even use the policy as an investment vehicle by borrowing against the cash value or cashing out the account.
#6 Benefit - Higher Credit Rating
Having a life insurance policy in good standing may help you get credit, buy a car and even get a job. It may look like a solid investment, but it is more than just an investment - it's also a credit tool. When you have life insurance in place, your financial stability is secured.
#7 Benefit - Get a Mortgage
Many mortgage lenders are reluctant to give out loans to people who do not have at least $100,000 in the bank (and if you have less than $50,000 the lender will offer a "low down payment" loan). However, if you have whole life insurance in place as part of your estate plan, this can help get you approved for a mortgage and buy a home.
#8 Benefit - Boost IRA Contributions
Many millennials don't have much money in the bank because they are paying off student loans and saving for a home. However, whole life insurance can be used to accelerate IRA contributions by providing a cash value that you can borrow against. You can use the whole life policy as a way to save more for retirement by borrowing against it.
#9 Benefit - Increase Capital Gains Tax-Free
The death benefit of a whole life policy is always tax free so long as the policy has been in force for at least twelve months and the entire death benefit has not been withdrawn from the trust within a five year period . If you withdraw the policy's death benefit, you will owe capital gains tax.
#10 Benefit - Tax Savings
The cash value of a whole life insurance policy can often be used to pay taxes. If, for example, your combined income and assets are less than $2 million, then the entire death benefit can be transferred to an irrevocable trust without having to pay capital gains tax on the difference between the taxable amount of your combined income and assets and that of the beneficiaries.
#11 Benefit - Retirement Income
If you don't have enough retirement savings or a pension from your employer, then there are two ways you can use whole life insurance as a way to create additional retirement income. First, if you have good health and live beyond your policy's normal life expectancy, then you can receive a tax free lump-sum death benefit. Second, the cash value can be used to take an income based withdrawal from the policy.
#12 Benefit - It Can Help Pay Off Student Loans
Students often need $10,000-$20,000 to pay off their student loans when they graduate. However, with whole life insurance it's possible to borrow against the cash value of the policy to pay off student loans as well as other types of debt such as mortgage or credit card payments.
#13 Benefit - Reduce Property Taxes
If you are a homeowner with real estate in which you have no mortgage, then a whole life policy can be used to reduce your property taxes. For example, if you own your home outright and your state assesses $200,000 of taxable value on the properties, then a whole life policy can be purchased for $200,000 that has a death benefit of $200,000 or less. Then if you die within the first 10 years of the policy's term, then the cash value will be distributed to beneficiaries to reduce their tax burden. For example, if there is a death benefit of $180,000 and the beneficiaries live in New Jersey (and don't have any other taxable assets), then their tax liability is reduced by $120,000 ($180,000 - $60,000).
#14 Benefit - Increase Your IRA Contribution Limits
If you are under the age of 50, then you can contribute up to $5,500 per year to your traditional IRA.
Conclusion
By utilizing a whole life insurance policy as part of your financial plan, you leverage the power of compounding which can result in serious tax savings as well as additional retirement income. Even if you already have a robust retirement account, this may still be a good strategy because it maximizes your tax-free growth potential while also providing you with extra liquidity through the cash value. Continue reading about: "Thinking of Purchasing Whole Life Insurance? Here's What You Need to Know ..."
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