Life or Death: How Life Insurance Satisfy’s Both Needs

Life Insurance

Life Insurance

Everyone probably already understands that life insurance plays an important role in family and business planning. It is actually more than important – it is a necessary part of any good plan. But did you know that your life insurance policy can also be structured as a tax-deferred savings tool with tax-free loan distributions when needed?

To better understand the value of life insurance in both of these family-need roles, ask yourself two questions: First, how many things in your life today do you want funded by life insurance in the event of your death? (Examples might be final expenses, mortgage, loan and other debt balances, college funding, spousal retirement funding and spousal income support) Second, how many of those things will require careful planning and accumulation rather than being affordable to pay-as-you-go in the event that you live to a normal life expectancy? (Examples might be college funding and retirement funding)

It is possible, with some of the new policies today, to structure certain life insurance policies to be a funding mechanism for these savings and accumulation needs. The policy will also pay a death benefit to those you leave behind in the event something happens along the way. When you begin loan distributions of the cash value for the purpose of your future living needs, the proceeds will be tax-free so long as the policy is not surrendered (there may be a tax due on prior interest growth if the policy is surrendered). Of course, loan balances, including interest charges, will reduce the future death benefit.

Why is life insurance a smart choice for college funding or retirement distribution needs?

For college planning, most forms of savings accounts, including 529 plans, will be counted for purposes of financial aid evaluation and could adversely affect qualification. Cash value of life insurance will not. 529 plans also place restrictions on their use whereas cash value of life insurance can be used for any expense, thus adding much needed flexibility.

With the US Debt reaching all-time highs of $18.6 trillion, do you expect tax rates to be lower or higher when you retire? Being able to borrow from cash value in your life insurance policy on a tax-free basis could very well enhance your retirement income without putting you in a higher tax bracket. Did you know that Social Security is taxed and Medicare premiums are increased if your taxable income meets certain thresholds? Tax-free distributions will not affect either.

How can a business utilize life insurance with an accumulation feature?

Many small and medium size businesses are LLCs, Corporations or Partnerships that have two or more non-married owners. When one or more owners die, become disabled or leave the business for whatever reason, the remaining owners typically want to purchase or recapture his or her ownership shares. Life insurance is important to secure the funding in the event of death, but the cash accumulation value might also help to offset the funding cost due to disability or leave.

There are several ways to structure a business buy-sell, but the two most common are Stock Redemption and Cross-Purchase. There are advantages and disadvantages to both that we would be more than happy to review if desired. It is recommended to seek the advice of an attorney to structure the agreement and then use an appropriate life insurance policy as the funding mechanism.

For a free discussion of your family or business needs, please contact Troy Newbraugh, Life Insurance Specialist at Creekside Insurance Advisors Inc. Agency licensed in VA, MD, WV. Phone: 1.800.467.5425.

Seek the advice of your accountant for specific tax information.

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