This month, as you consider how to say “I love you” to that special person in your life, skip the flowers, stuffed animals and chocolates, and opt instead for the true gift of romance: life insurance.
While this might not be immediately as well-received as jewelry, per se, it is a gift that will keep on giving long past February. OK — that’s likely too much of a stretch — you still need to get something to keep you out of the dog house.
Life insurance often, admittedly, gets a bad rap. But ask any financial professional and they will likely tell you it’s a critical component of any holistic financial strategy. It can be a very effective way to protect the ones you love financially.
While most of us are aware of how life insurance works, there’s more to many permanent life insurance policies than meets the eye.
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The most common reason for purchasing life insurance is for the death benefit, which is paid out to beneficiaries — generally income tax-free — after the death of the insured. However, permanent life insurance can offer a number of other benefits — not only to the ones you love — but benefits you may be able to leverage during your lifetime as well (a Valentine’s gift to yourself). Yet, many of these benefits are either forgotten or misunderstood and never exercised. In fact, more than half (51 percent) of all respondents said they were either unsure or did not believe life insurance could provide investment opportunities and living benefits, according to the Allianz Life 2018 Life Insurance Needs Survey.
Here are three ways permanent life insurance can help cover the ones you love — including yourself:
— Provide financial reassurance.
— Build accumulation value.
— Leave a legacy.
Provide Financial Reassurance
For surviving spouses, navigating life after the loss of their partner is already difficult enough without the added strain of managing finances or making do with less monthly income.
The death benefit from a permanent life insurance policy can help alleviate some of this financial stress by helping to cover immediate needs such as paying for medical expenses and a funeral. Longer term, this money can help cover day-to-day expenses by replacing a lost income (such as a pension payment or spousal Social Security benefit), or by being put toward the big things like being able to stay in the family home or paying for college.
Life insurance can help ensure that milestone goals such as paying off the mortgage, attending graduations, and either retiring or staying retired remain on track in the event of the unexpected death of a partner or spouse. What’s more — when properly funded, benefits received from life insurance are generally not taxable income to beneficiaries.
While nothing can replace the loss of a loved one, having additional, (possibly income tax-free) funds available for future needs can help provide reassurance both to you as the policyholder while you’re alive, and to any loved ones who are the beneficiaries after you are gone.
Build Accumulation Value
In addition to providing protection, some life insurance policies offer the opportunity to build accumulation value over time. Fixed index universal life insurance policies earn interest based on positive changes in an external market index or a fixed interest allocation. This can mean the opportunity for greater accumulation potential over the life of the policy, compared to traditional universal life insurance. You should also ask about a built-in annual floor that ensures the policy values will not decrease due to market volatility (although certain fees and charges will reduce policy value). Since the cash value is not directly invested in the market, policy values are not negatively impacted by negative index performance (although certain fees and charges will reduce policy values).
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In some instances, if a policy has earned sufficient interest, a portion of that money can be accessed by taking out a loan or withdrawal against the cash value balance and receiving the money generally income-tax-free (depending on how the policy is funded), which must be paid back with interest. You might consider this as an option to help fund a child’s education, potentially help supplement retirement income or address any number of other financial needs.
There are several things to consider before taking out a loan against a policy’s cash value balance. For example, the loan — plus any interest paid — cannot exceed the total cash value available in the policy. If this happens, you’ll need to add in more premium to the policy or it could lapse, and you’ll end up paying taxes on the difference portion of the distribution. If you’re going to exercise your right to policy loans, be sure, with the help of a financial professional, to carefully manage your policy values to help prevent a policy lapse and adverse tax consequences. You should never attempt to manage this on your own.
Working with a financial professional can help you navigate these nuances, and ensure you have a solid financial strategy in place before taking out a loan against your life insurance policy.
Leave a Legacy
For older consumers, leaving a legacy through the death benefit of a life insurance policy can be a way to financially protect them and show you care long after you are gone. One reason to consider purchasing or maintaining life insurance as an older consumer is you may have had more time to save and prepare your finances and may look at a life insurance policy less as a protection product, and more as a way to benefit those you leave behind.
As mentioned above, if structured properly, the death benefit paid from a life insurance policy may leave a legacy that isn’t subject to federal income taxes. Working with a tax professional can help to clarify a path forward for life insurance policy beneficiaries.
With February being all about Valentine’s Day, stop fretting over choosing the perfect gift. Spend time with your loved ones and be reassured knowing they’ll be financially protected when you’re gone.
After all, nothing says I love you like investing in their future financial stability.
[See: How to Pick Stocks: 7 Things You Should Know.]
Disclosures: The indexes available within the contract are constructed to keep track of diverse segments of the U.S. or international markets, or specific market sectors. These indexes are benchmarks only. Indexes can have different constituents and weighting methodologies. Some indexes have multiple versions that can weight components or may track the impact of dividends differently. Although an index may affect your interest credited, you cannot buy, directly participate in or receive dividend payments from any of them through the contract. Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Withdrawals in excess of premiums paid will be subject to ordinary income tax. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. If a policy is a modified endowment contract (MEC), policy loans and withdrawals will be taxable as ordinary income to the extent there are earnings in the policy. If any of these features are exercised prior to age 59.5 on a MEC, a 10 percent federal additional tax may be imposed. Tax laws are subject to change and you should consult a tax professional.
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How to Invest in the Ones You Love originally appeared on usnews.com
