When looking for life insurance you should evaluate some important questions.
Am I being realistic in how far the proceeds will go for my family? How long of a term should I buy or should I get permanent policy.
There are different schools of though on how much insurance to carry. I have never met anyone who had a claim who said that they received too big of a benefit. With the cost of insurance dropping it is very affordable to get a lot of death benefit at a low cost (this is based on age and health of course). I would certainly err on the side of too much rather than too little. I suggest to my clients that they buy enough death benefit that will spin off enough income without touching the principal. For example, if Client A makes $50,000 a year, they would need 1 million dollars invested conservatively at 5% to spin off $50,000 a year income. That is not considering any inflationary factor, but just maintaining the income level for the family at a minimum. There are other ways to estimate this, but this is a good rule of thumb I like to use.
It is important to first and foremost get the amount that you need. Don’t buy to little permanent policy just because you want permanent and can only afford a fraction of what you need. If you need 1 million and can only afford twenty year term, just get the term in place and you can always convert all or part of the term to permanent later. A lot of our clients will buy a blend of cash value life insurance and term. They may have a budget to buy $100,000 0f whole life insurance and $900,000 of term. It is always important above all else to get the amount you need.
Qualified plans certainly have a lot of value, but they certainly have their limitations. Permanent life insurance cash value can be a fantastic supplement to a qualified plan for retirement. A qualified plan such as a 401k is loaded with limitations and penalties imposed by the government. For example, money inside the plan is not accessible until 59 and a half without a penalty. Once a person, hits 59 and a half there are limitations with how much can be taken out. On top of that, the government determines the tax rate that you will pay when the money is taken out of the plan at retirement. While the tax rate might be one thing today, it could certainly change and be higher when you retire. The whole concept of compound interest is great, but it also builds compound tax that you must pay.
It is great if you are contributing to your qualified plan as that means that you are saving. Most americans do not have a high enough savings rate. We suggest to our clients to make sure and take advantage of any company match. If your company will match you up to 3% or 5%, try to contribute that amount and get the free money. After you reach the match, we suggest putting additional savings in things like cash value life insurance. The cash value grows tax deferred and can be access on a tax-free basis. On top of that, the government doesn’t put as many constraints on the money. There is no compound tax to be paid on the policy if you keep the policy in force. Also, life insurance cash value is liquid and you can get to it at any point. Certain types of cash value policy’s like whole life and universal life have guarantees in the cash value. You cannot lose money, like you can in the stock market. The cash value will get better no matter what.
Do you own your own business? Do you have employees that are invaluable to the success of your company?
If you do, you may want to consider key man life insurance. Key man is basically taking out a policy that the company owns on a key employee’s life. The company is responsible to pay for the premium as they are the beneficiary. To establish the face amount of the policy, the company and their agent determine what they consider the value of that employee to the business. If something were to happen to this employee, the company would receive a death benefit that would help cover the financial loss to the business.
Key man is not limited to the CEO and the President, as it can be anyone who is valuable to the business and its success. Often times the business will use cash value life insurance to cover the life of the key employee (s). They can use the cash value to loan money to the business along the way. On top of that, they can give the policy at some point to that key employee as an extra perk. Some company’s will simply use term life as it is cheaper and for a period specific. It can also allow a company the ability to purchase even more death benefit with mortality rates at an all time low.
If your business would suffer with the loss of an important employee, you may want to take a look at key man life insurance
The world today can be very litigious and the risk of getting sued is high. It is important to work with your financial advisors to create as much of a bulletproof plan as you can. While that would be the goal, it is very difficult to avoid all possible risk.
One necessity of this is to have the proper insurance planning. Two products that are protected from creditors are cash value life insurance and annuities. Often these products are used by physicians or others professionals to protect there assets with malpractice and personal liability being such a big issue in today’s marketplace. Premium financing has become very popular using insurance and annuities.
Not only do you get the creditor protection with the products but you also get tax advantages with each one. With Annuities the growth is tax deferred and with life insurance the growth in the cash value can be accessed tax free if used correctly. Annuities are not necessarily a good fit for everybody, but with the right application they can be very effective. To read more about cash value life insurance and annuities you can read about it on www.massmutual.com.
If you haven’t established a risk mitigation plan, you may want to speak with your financial advisors and take a look at how these products and others might be added to your plan.