“Insure First What You Can Least Afford to Lose”
Everyone knows the first step when building a home is to have a solid and stable foundation. The same is true of your financial house. Life insurance is one of the basic levels of protection that provide the stability for you to begin building your financial house. Along with health and disability insurance, life insurance is a mandatory part of any reasonable financial plan. Aside from basic death protection, life insurance has many valuable uses and applications. Some of the main reasons why you should buy life insurance are listed below.
- Income Replacement. Most families depend on the breadwinner’s income to survive. Adequate life insurance will guarantee an income to your family in the event of your death. Additionally, as mentioned above, disability income insurance is just as important as the likelihood of disability is much higher than death at most ages.
- Economic Human Life Value. If you are employed, you have what is known as a human life value which can be defined as your number of working years remaining multiplied by your annual wage, adjusted for inflation and earnings growth. It is the amount of money you can reasonably expect to earn until you retire. It is extremely wise to consider your human life value when determining the amount of life insurance you buy.
- Liquidity and Wealth Creation. Life insurance creates an immediate liquid estate. It provides immediate funds to cover emergencies and contingencies.
- Debt Protection. Life insurance is the ideal vehicle for paying off debt at your death. No one wants to burden their family with bills, loans or other outstanding obligations. Life insurance can assure that your family doesn’t have to experience financial loss at a time when their emotional loss is the greatest. Mortgage life insurance is a very cost effective way to make sure that funds are available to pay off your home in case you are no longer around to make the payments.
- Paying for College. Life insurance can assure that your children or grandchildren go to college. The proceeds are payable if you die prematurely providing the funds for college. Additionally, many universal or whole life insurance policies build cash value that may be accessed tax free via withdrawals and loans. These policies provide an excellent source of funds to pay for college fees.
- Key Man Insurance. Many businesses and especially small companies depend on a few key people for their success. To protect the company’s exposure from loss of a key person, key man life insurance can be purchased on the life of the employee or executive. In the event the key person dies, the business receives the life insurance proceeds and can then use the funds to hire a capable replacement or make other arrangements.
- Business Continuation Planning. Life insurance can be a useful tool for the efficient transfer of the ownership interest of a business in the event of death of a shareholder or partner. In these cases, a life insurance policy is usually purchased on the life of each business owner based on his or her ownership interest. At death, the life insurance policy proceeds are then used to buy-out the deceased owner’s interest from his or her family. Because life insurance pays at the time of death, it is a perfect vehicle for providing the needed funds for efficient business succession. For more specific information, see “buy/sell planning using life insurance.”
- Estate Transfer/Tax Planning. One of the best uses of life insurance is in paying off estate taxes. If you have an estate that is subject to estate taxes, the most efficient method for paying these taxes is likely life insurance. A properly structured estate plan, may include an irrevocable life insurance trust funded by a survivorship or second-to-die life insurance policy. When the eventual estate tax becomes due, the life insurance proceeds are payable to the irrevocable trust which then pays the estate tax while the actual estate passes to the beneficiaries intact. For more details see, “using life insurance to pay estate taxes.”
- Charitable Planning. Life insurance can be used creatively to provide money to your favorite charities while at the same time providing lifetime income with tax advantages to you over your lifetime.
- Retirement Planning and Cash Accumulation. Life insurance can work for you whether you live or die. It is a unique financial vehicle in that it provides for tax deferred accumulation of cash, tax free income and tax free proceeds at death. Because of these tax advantages, life insurance is in many cases a safe and effective place to build cash. Whole life and universal life and more recently equity indexed universal life policies are the primary types of cash value life insurance. For more information see, “Using life insurance policies to provide tax free retirement income.”
There are obviously many reasons to buy life insurance. However, the most important reason to buy life insurance is because you love and care about someone. In the event of your death, you should want to make sure your family and interests are protected, your debts are covered, your mortgage is paid and your kids can go to college. Additionally, if you own a business you want to make sure that what you have worked so hard to build is protected and that your family would receive the fair market value for the “fruits of your labor”. And finally, if you have been fortunate enough to build a large estate, using life insurance is probably the smart and least expensive way to pay your estate taxes.
For questions on life insurance, or to receive a custom life insurance quote, call MEG Financial today at 877-583-3955.