Life Insurance: Forgotten Financial Tool

Life insurance should be a key component of your financial plan, especially for retirees and pre-retirees.

“I would recommend highly that everyone who’s concerned about not only their financial well-being but that of their spouses and the next generations look closely at the economic value that life insurance could play in meeting their financial objectives,” says Eric Bailey, CEO and founder of Bailey Wealth Advisors in Silver Spring, Maryland.

But, says Dana Anspach, CEO and founder of Sensible Money in Scottsdale, Arizona, life insurance is often an afterthought. “What I see most frequently is somebody was sold some type of life insurance policy from a product perspective,” she says. “And then we ended up figuring out, now where does it fit into your financial plan? So unfortunately, I see it happening backwards.”

You need to sit down with your financial planner to determine how to fit it into your financial plan and what kinds of life insurance products will meet your specific needs, whether it’s term life, whole life, universal life or another type of life insurance.

“For very specific goals and needs, life insurance can be the best tool,”

“For very specific goals and needs, life insurance can be the best tool,” says Beau Henderson, founder of RichLife Advisors in Gainesville, Georgia.

“Different policies could each have different designs,” says Anspach. “Be very clear, working with your advisor or consultants to determine the purpose of the policy. Does it fall into one of these buckets and then how do they help you design a policy that suits that need?”

“What we need to be able to do is educate people on the spectrum, going from term to universal life, to index universal to variable universal to participate in whole life,” says Bailey. “There’s usually a challenge there for most people of understanding which one is going to be most effective for them. And depending on what their objectives are, how should they handle it.”

Generational Wealth

• Generational wealth: Tax-free income for children and grandchildren

“If we’re talking about generational wealth, people who have a strong desire to make sure they’re leaving wealth, then life insurance is a great tool,” says Anspach.  “You can budget for it and know that you could spend down the rest of your assets and this specific amount will still get passed along.”

“This is legacy planning,” says Henderson. “You want to leave your children an asset. If you leave my 401(k) or an IRA, it could be it could be taxed at 50%.  But if you instead use the money to pay the premium on life insurance, those kids are going to get 100% of that money tax free. t’s another way to protect you for future taxes.”

“It’s a valuable tool for creating generational wealth, and certainly one in the African American community that could be better used for creating for closing the wealth gap,” says Bailey.

Replacement Income

• Replacement income in the event of the death of a spouse

Henderson said life insurance provides the policy holder with leverage when one spouse dies. “If a spouse were to die, then we’d replace their income,” he says. “For the for the cost of life insurance, the leverage you have on that asset if that event happened, here’s no other place we could have that much protection for so little investment. “

Additional income

• An additional source of retirement income for high-net worth individuals

The financial planners all said a life insurance policy can function much like a Roth after you’ve maxed out your 401(k). “You’re using after tax dollars to fund a vehicle,” says Bailey. “The money accumulates tax free, and you have the ability to take the money out of the life insurance contract tax free. So, you not only have the income that you’re going to get from your 401(k) accounts, which is taxable, but you also have this other tax-free income stream that matches that.

Pay Estate Taxes

• Use the proceeds to help your heirs pay estate taxes

“You can also see it effectively used to cover state taxes if they are high net worth and are likely to have a taxable estate,” says Anspach.

Rodney A. Brooks is the former deputy managing editor/Money at USA TODAY. His retirement columns appear in U.S. News & World Report and Senior Planet.com. He has written for National Geographic, The Washington Post and USA TODAY. The author of “Fixing the Racial Wealth Gap,” Brooks has testified before the U.S. Senate Special Committee on Aging. His website is www.rodneyabrooks.com.