The best time to have life insurance is when you die or when you need access to money for opportunities and purchases. The reason I say the best time to have life insurance is when you die, is so your family gets a death benefit. It does you little good other than protect your income years, if you pass away with no insurance. If you paid for term for 20 0r 30 years and now you die with no coverage, that is quite unfortunate. Most assume that once you get to a point and you have accumulated enough money, you can self insure with your existing assets. This is a strategy that the life insurance carriers certainly like as they don’t have to ever pay a death benefit. All of the premiums paid during those years were pure profit to the company. Only about two percent of term life policies ever actually pay a death benefit.
The other time it is great to have life insurance is when you need capital for whatever reason. The reason could be for investing or buying a new property or a car. If you have a cash value policy, you can have access to the cash value that you have accumulated and you can borrow against it, to buy whatever you want. I promise you will be happy when you want to make a down payment on a new home and there is enough money you can access in your policy. The other beautiful thing about a cash value policy is that it is permanent and your family will eventually get a tax free death benefit.
Whole life is a great product to buy and the younger you are when you buy it, the better off you are. When you buy whole life insurance you lock into the mortality of the age of purchase. In other words, the younger you are, the lower the mortality of the policy and the lower the premium is you lock into. The premium of whole life never increases, so it will remain level until age 100.
On top of locking into the mortality of whole life, it is also beneficial to get the policy going early from a cash value perspective. The earlier you start the more time you have to accumulate a very significant amount of cash value inside of the policy. The cash value can be used for policy loans to buy things during the course of your life, make investments, etc. The cash value also can grow into a substantial amount of money and can be used as a source of retirement income. The money grows inside of the policy on a tax-deferred basis and can be drawn out in retirement on a tax free basis. The way that you would do this is to take withdrawals from the policy until you reached your cost basis. The withdrawals wouldn’t be considered taxable as it is return of the money you have contributed. Once you reach the cost basis, then you start taking money out with preferred policy loans. Some interest will be charged, but you will avoid paying taxes on the loans.
It is great to have a permanent whole life policy when you reach retirement. Many folks will be ending their terms and have no insurance. It will allow you to have insurance into your retirement years and have a very reasonable premium.
What life insurance company do I want to select as my carrier?
This is not a simple question to answer because there are so many good carriers on the market. On top of that, different companies have different niches in terms of their best products. If you are looking for a good universal life product then it might be one company, and if you want a good dividend paying whole life policy, than it might be other companies.
In terms of which one to select, you should figure out what type of product you want to buy and find out which carriers have the best products in that area. You should make sure that any life insurance company that you use has a good financial rating from the major rating services. If price is the most important than make sure you are getting the most competitive rate, by shopping all of the main carriers. If you just want to buy term life than price is probably your main concern and the company is probably less of a concern. As I said before, just make sure the company has good financials and at least an “A” rating.
At the end of the day, most companies will offer term options and permanent options. They will usually have various level terms, return of premium term, and either whole life and/or universal life. For the most part, you can’t go wrong provided that it is a reputable company. It is usually more important to pinpoint a specific company when buying cash value products.
Term vs. whole life insurance is one of the oldest debates around. We find that people are on polar opposite sides of this debate and often times for reasons that don’t make sense. I have heard, “I will only buy this type of life insurance because that is what my brother had and its the best”. Another popular one is, “Suzie Orman and Clark Howard said to only buy term insurance”.
The answer to which type wins is that it is impossible to say. Both types serve great purposes and can be used as very effective tools. Term life is just like renting your insurance and is less expensive initially than whole life. With term you will select a term period of 10, 15, 20, or 30 years and the premium will be level for that period of time. Term is a great product that you can get a lot of in your greatest time of need. For example, if you have just started a family you will want to maximize the amount of life insurance while your kids are growing up. Term is so affordable it will allow you to buy a big amount during that time.
On the other end of the spectrum is whole life insurance. When the term life’s level term is ending, the premium will start going up briskly. The whole life premium starts off being more than the term, but remains level for the life of the contract. By year 21 of a 20 year level term, you will probably be paying more for the term than the whole life at that point. Whole life is a permanent solution unlike term. Whole life is designed to build equity like owning a home and to last for your whole life. The cash value that is accumulated inside the policy can be borrowed against like a home equity line of credit.
Which type is better? The answer is neither and often time it makes sense to have some of both to meet different needs.
When you reach retirement have you thought about what tax bracket you will be in? Will you be in the same bracket that you are currently in? Will tax brackets stay the same or will they go up?
The bottom line is nobody is 100 percent sure about what the answers will be to these questions. We can’t control what happens with taxes as they are controlled by the government. What we try and get our clients to focus on is putting their money in places that will be tax-favorable
Where can you put your money that is tax favorable? The two main places that you can put your money that can avoid any taxation is permanent life insurance and roth IRA’s. Roth IRA’s are great tools, but they are highly limiting. If you make too much money, you can’t participate. The government dictates how and when you tap into the money. Don’t get me wrong as it is great if you can take advantage of it. The other tax-advantaged vehicle is permanent life insurance. You can build up the cash value inside the policy on tax deferred basis and then tap into it tax-free. You tap into it tax-free by withdrawing up to your cost basis first. Once you have hit cost basis you get a stream of income through preferred policy loans.
One of the main places people put money is in tax-deferred vehicles like 401k’s. While the tax deferral makes the money compound quicker, deferred compound taxes have to be paid on the backend. The more vehicles that you withdraw from at retirement that you have to pay income tax on, will potentially place you in a higher tax bracket.
Life insurance has many uses personally and for business. Personally it can be used as protection against premature death, for tax-free accumulation for retirement, for loans for buying items such as cars, charitable giving to your favorite charity, and many others. From a business standpoint, life insurance is used to secure loans, set up buy-sell arrangements, key-man protection, deferred compensation, and loan money to the business for expansion, etc.
It is important to understand how to use life insurance, so you can maximimize the value to you, your family and your business. The most common use is to buy a term policy that will cover you in the event of your untimely death. This policy can be used to provide income replacement to your family or buy your partner out in a buy-sell arrangement. Term is often used for court ordered life insurance decrees, key-man insurance and to function as a loan guarantee. When you start using cash-value products like whole life and universal life, there are even more creative uses. The internal build up inside of the policy can be used as an incredible supplemental piece to your retirement. The money grows on a tax deferred basis, and can be accessed on a tax-free basis if done correctly. The internal buildup is also a great fund to draw upon as you go to borrow against to buy new cars, invest elsewhere, etc. Cash value life insurance is also commonly used as the mechanism for deferred compensation for companies with its leverage and tax-advantage. There are many other uses that I am not mentioning, but this shows the tremendous flexibility of these products.
Life insurance and annuities have many different types and applications. If used properly and in the right context they can very valuable and used to your tax advantage. Often times, they may be used in inappropriate places and then they don’t make as much sense. For example, if a client needs to have access to all their money in 5 years, it doesn’t make sense to buy a 10 year surrender annuity product. If the client can doesn’t need the money or to draw on it for 10 years, there are some terrific deferred annuities that they can purchase.
Life insurance and annuities are both considered insurance products. They both have tax advantaged treatment and have a death benefit. Life insurance cash value (if accessed correctly) and death benefits are both tax-free. Both fixed, indexed, and variable annuities are all tax-deferred. You won’t pay any taxes until you start pulling money out of the annuity. Life insurance is different in the sense that it provides leverage for the client. A premium is paid and creates a huge leverage with the death benefit. For example, a client pays a monthly premium of $50, and the insurance company is on the hook to pay a $750,000 death benefit. On the other hand an annuity pays out what is in it to the beneficiary. For example, if your balance is $200,000 in an annuity, your beneficiary will get the $200,000.
Many annuities offer bonuses now to incentivize clients to put their money in one of their products. Some carriers offer as much as a 10 percent bonus on money put in to the annuity. We work with a lot of clients who use the tax advantage of life insurance’s cash value to provide a tax-free stream of money at retirement.
Suzie Orman is a dangerous person to listen to. She is a jack of all trades and a master of none. Her blanket statements about life insurance are ignorant and without grounds. She constantly says that permanent insurance is a rip off and you should always buy term life. Why is that Suzie? Do you understand the tax advantage of life insurance with its buildup and death benefit?
While in many cases term is the appropriate direction for people to take, it is not always the best route. If you can afford to buy some permanent life insurance I would certainly suggest you do. That is the only type of insurance that is guaranteed to be in force when you pass away (provided you pay the premium). The life insurance companies love when you buy term as they pay death claims on about 2 percent of the policies. In other words, most people pay for life insurance for years and their family never gets any benefit.
On top of the permanent nature of this type of insurance, you can accumulate money on a tax free basis in the cash value. If accessed the proper way, you can avoid ever paying income tax on any of the build up and can supplement you retirement tax-free. Also, the cash value can be borrowed against during the life of the policy to buy things, invest, etc. Suzie Orman is obsessed with 401k plans and loves the tax-deferral, but tax-deferral simply means you will pay compound tax later. In addition the government controls the rules on these types of plans, while they don’t on life insurance. A good example is you can’t access until 59 and a half. What if the government adjusts the age to 62 and you are simply at their mercy.
Is it a good idea to by whole life insurance for my child? The answer would be a resounding yes!!!!!!!!!!!!
It will be an incredible asset for your child to have as they enter childhood. It will also guarantee them insurability, even they become uninsurable during their adult years.
Whatever age the policy is purchased, it locks in that mortality and it never changes. In other words, the sooner you buy it the more beneficial it is to the policy and the premium will never go up. The lower the mortality, the lower the cost of insurance. Also, the earlier it is purchased, the more time the policy has to accumulate cash value. This cash accumulation can be used to borrow against for the life of the policy. These loans can be used to buy cars, help fund college, down payment on a house, etc. On top of that it is a great start for the childs retirement and a nest egg that they will be able to draw upon at some point. Locking in the insurability is important, so they can guarantee they have life insurance when they have their own kids. It may not be enough to cover their whole need as a parent, but it will be a great start that nobody can ever take away from them.
I wish that someone had bought one of these policies for me when I was a child as they are an incredible gift. It has protection, accumulation, and tax free growth going for it.
Have you ever heard of “Infinite Banking”? It is a great strategy that is pioneered by Nelson Nash that uses the cash value of life insurance as your personal bank. In essence you buy big ticket items with the cash inside the dividend paying whole life insurance policy and finance the purchase with it. For example, you buy a new car with the buildup in your policy and then amortize the loan over a period of time and pay your policy back at a fair interest rate above the interest rate of the insurance company. Rather than make the bank or finance company rich, you are able to recapture a lot of the finance charges you would otherwise payout elsewhere. After paying back the loan to yourself, you have completely repaid the principal and made the interest spread yourself. This will turbocharge your policy.
Not only is the cash value used during your life for various purchases, investments, etc., but it can be used for retirement income as the money can be accessed at retirement tax-free. In order to create the “infinite Banking” concept you need to capitalize the bank. Just like Bank of America or the community bank, there was no money in the bank until it was capitalized. Once it is capitalized, the fund has been created to use for this purpose. It is important to set the policy up correctly with a good mutual company and to fund it the appropriate way. The structure of the policy is important for your long term success.