Certified Public Accountants | Business Advisors

Life Insurance for Solving Middle-Age Financial Priorities

The older we get, the more financially complicated our lives become. It seems like one day we wake up and we have a mortgage, ongoing home repair and maintenance demands, a 401(k) plan siphoning money from our paychecks, two to four cars in the driveway, two or more children headed for college and life, auto, health, disability, and long-term care insurance policies.

In other words, suddenly a substantial portion of our income is spread across a dozen different expenses and savings vehicles. Unfortunately, when assets get spread too thin, there might not be enough available to cover all the costs. Important long-term goals like retirement could end up at the short end of the stick.

That’s why it’s important to explore various savings and insurance vehicles to see if there are solutions suitable to combine a variety of your financial needs. For example, there are life insurance policies designed to address multiple priorities, including contingencies you might or might not need – such as disability payouts or long-term care.

The most important distinction among life insurance policies is between term and whole life. A term policy lasts for only a specific period of time and will provide a specified “face value” insurance payout in the event of your death. That’s all it does – when the term ends, so does the coverage.

The second type is called whole life because it remains in force for as long as the owner has paid-up premiums, so potentially for his or her whole life. However, in additional to a one-time payout to beneficiaries when the owner dies, whole life also features a cash value account, which accumulates over time using a portion of each premium payment. The cash account can be accessed by the owner while he’s still alive for whatever he needs it for, such as disability payouts, long-term care, to pay for college tuition, buy a new car, pay medical bills or even to pay the premiums for the insurance policy itself.

Some types of whole life policies permit the owner tax-free access to the death benefit to pay for long-term care expenses or if he or she receives a fatal diagnosis, such as cancer. This feature protects the owner from having to deplete other assets, and whatever amount remains of the death benefit at the owner’s death will still pass on to heirs.

Interestingly, older whole life policies were originally written with a term – they matured when the owner turned 100 years old. That means the policy will pay out the death benefit while the owner is still alive. But now that life spans extend much longer, today’s policies are typically written to mature when the owner turns 121.

Whole life policies also provide some tax advantages. Paid premiums cannot be deducted; however, the cash account accrues tax-deferred and distributions are tax free up to the amount (basis) paid in premiums. In addition, the death benefit paid out to beneficiaries is not considered taxable income, although it may be subject to federal estate taxes. If you’re worried about using up all of your assets during retirement and not leaving anything to your children, consider that life insurance is a viable way to leverage annual premiums into a larger inheritance for heirs.

Some people get life insurance through their employer, but that’s usually only enough to tide a family over for a year or two. If you’re interested in exploring how to use life insurance benefits to solve for multiple financial priorities, consider the advantages of various types of whole life policies.

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