courtesy of: Prudential Financial Inc
The bottom line: When you die, life insurance provides money to the people who depend on you. It can also do much more. So, how do you know which type of policy to choose for a particular need you may have?
There are two main types of life insurance policies:
- Term Policies: For short-term needs, usually 30 years or less
- Permanent Policies: For needs that tend to last indeﬁnitely
Now, let’s look at the powerful ways life insurance can help you, starting with the most obvious:
One: Provide Money to Help the People You Love
You work hard to provide for the people you love, seeing to it they have what they need. But what will happen to them when you die? Think about how they’ll be able to pay for such things as your ﬁnal expenses, debt, the mortgage, care of a child, or a college education for your kids or grandkids.
Life insurance provides them with a sum of money, known as a death beneﬁt. In general, a term policy can help you to meet these needs. If you want a longer-lasting policy, take a look at a permanent policy.
Two: Leave a Legacy
You want to leave a meaningful amount of money to the people you love and the causes you care about. You also want to minimize the impact that taxes can have.
Life insurance can provide them with a lump sum of money. A portion of the death beneﬁt from a life insurance policy can be used to pay any taxes that may be due on your estate. Typically, your beneﬁciaries won’t have to pay any taxes on the money they receive from your life insurance policy, per IRC §101(a). A permanent policy for one or a permanent policy for two is generally the type of policy to choose.
Three: Create Another Source of Income, Especially for Retirement
As you go through life, you’ll probably have some large expenses, such as paying for your kids’ or grandkids’ college educations, the mortgage, or a major emergency. You may also want to supplement your retirement income—another large expense.
Over time, many permanent life insurance policies offer you the potential to accumulate cash value. It can be used any way you wish,1 including as extra retirement income, through tax-advantaged loans from your policy’s cash value. Indexed and variable permanent policies are often used as part of an income strategy.
Four: Have Access to Money In Case You Get Sick
People are living longer than ever before. It’s important to think about how you could get the extra money you might need to take care of yourself if you get a chronic or terminal illness. Permanent life insurance can help.
In addition to tax-advantaged access to cash value,1 many policies offer an optional, added provision, called a rider,2 that lets you accelerate the death beneﬁt while you are still living. The money can be used for any reason.
Five: Pay Less in Taxes
Taxes are a fact of life. Many of us don’t want to pay any more in taxes than we absolutely have to. Life insurance offers tax beneﬁts. Both term and permanent policies will provide your beneﬁciaries with a typically tax-free death beneﬁt when you die, per IRC §101(a).
While you’re living, you can take income tax-free loans from the cash value of your permanent policy.1
Six: Protect Your Business
As a business owner, you have a lot to protect—your business, your employees, and your family. If one of your partners or key employees dies or becomes disabled, there needs to be as little impact to your business as possible. You also want to attract and retain top talent.
Permanent life insurance can help with business continuation when a partner or key employee dies. It can also help facilitate the exchange of business ownership in the event of your or a partner’s retirement, disability, or death—without depleting the business’ capital. Permanent life insurance can be used to fund non-qualiﬁed retirement plans. Term policies can also be used to help protect your business.
There are different types of term life insurance. Some are for very short terms, others longer. Some will return your premiums at the end of the term. There are also different types of permanent life insurance: universal life; indexed universal life; and variable universal life. Explore each policy type so you can make an informed decision about which policy or policies ﬁt your circumstances.
- You can access your cash value through loans and withdrawals. In general, loans are charged interest; they are usually not taxable. Withdrawals are taxable only when you take more money out of the policy than you’ve paid in premiums. Loans and withdrawals may reduce or eliminate the death beneﬁt payable to your beneﬁciaries.
- Accelerating the death beneﬁt will reduce the death beneﬁt dollar-for-dollar and may result in beneﬁciaries receiving less or zero proceeds at death, if the death beneﬁt is fully exhausted due to beneﬁts paid out under the rider while the insured is alive.