Life insurance policies are primarily used to provide death benefits to beneficiaries after you die. However, the nature of some life insurance policies means there are creative uses that are not well known by some people. Some of the best-kept secrets for life insurance might be beneficial for you and your family.
Generational Wealth Transfer
While life insurance is typically purchased on your own life, you may purchase it on the lives of other people, provided that you have a personal and economic interest in those people. If you purchase life insurance on your parents or your grandparents, it will allow them to spend down their assets without worrying about whether they should pass any of their wealth along to you. Instead, you will use a life insurance policy to purchase the maximum amount of death benefit you can, or at least enough to equal their personal savings plus the estimated cost of premiums for the rest of their life. As long as you have their consent, you pay the premiums on the policy and will receive all of those premiums back (with interest) through the death benefit on a tax-free basis. This money may then be used for any purpose, including your own retirement.
When you pay premiums on a dividend-paying whole life insurance policy, the dividends are normally set to buy additional paid-up insurance. This is why the death benefit on dividend-paying whole life policies increases over time. When the insurer pays a dividend, the death benefit increases according to the amount of insurance that the dividend can purchase. Those dividends may also be used to reduce or eliminate your premium payments. If the dividend is at least equal to the premium payments, your premiums “vanish.” This strategy should be used with caution, however, since dividends are not guaranteed by the insurance company. If dividends ever decrease in the future, you may need to pay for premiums out of pocket again.
A limited-pay life insurance policy is a whole life insurance policy that allows you to pay premiums for a set number of years and then stop. Unlike a vanishing premium strategy, the limited-pay policy will not accept any premiums after a set number of years. Instead, all of the dividends earned in the policy, if any, will be used for enhancing the death benefit and cash value account. This policy eliminates the uncertainty of paying premiums for your entire life, since many limited-pay policies have only 10- or 20-year payment periods.
Life insurance premiums are tax-deductible when a business purchases a policy on the life of an employee. This tax-deductible policy is used to offer an employee a fringe retirement benefit. If the company is a one-man corporation or a limited-liability company, the owner can use this as a way to reduce the amount of personal and corporate tax that is owed. Even though premiums paid to the policy are treated as taxable income for the employee, the company may pay the tax, as a tax-deductible expense, for the employee. This makes transferring wealth out of the company efficient.
10 Reasons to Buy Life Insurance
- To protect your family if you lose a job or change jobs that had provided life insurance.
- To pay for funeral expenses, loans or any outstanding debt.
- To cover your childrens’ future education expenses if you are not there to provide.
- To provide funds for your family to pay off a home mortgage.
- To protect a business by letting partner/beneficiaries buy out a deceased partner’s business interests.
- To set an example of responsibility and family values for your children.
- To provide child care or elder care for aging parents if the top caregiver/provider passes away.
- To provide peace of mind for your loved ones in uncertain financial times.
- To comfort your loved ones in a difficult time of loss and grief.
- You do it for love. To insure those you love the most by leaving them a legacy of your life.