Life insurance is a fundamental part of a responsible and reliable financial strategy. While it only takes a little planning for your clients to protect themselves and their families from future instability, shockingly around 49% of the adult population do not have any kind of life insurance. Many of these people believe a life insurance policy is either too expensive, too complex, or simply impossible to understand — and because of this, their families are left unprotected in the event of an unfortunate tragedy.
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Perhaps one of the most significant problems is that people assume they can only use life insurance for limited functions, such as paying off mortgages or funeral costs. The truth is, life insurance can be highly versatile, customizable, and often perfect for creating a sanctuary against the unpredictability of the future.
If you are a life insurance agent, you know all of this. But some new agents and advisors who come in from outside the life insurance sector may not understand how useful, and versatile, life insurance can be.
Even if you are a life insurance veteran and have all of this memorized, in several different languages, it maybe useful to see how all of this looks to consumers who are vague on just what life insurance does.
Here’s a look at some of the uses for life insurance that many ordinary people may not have considered before.
1. Equalizing Inheritances
In an ideal world, most of us would prefer to offer an equal inheritance to each of our heirs. Unfortunately, the nature of the clients’ assets may make this impossible. For instance, it can be challenging for more than one person to share an inherited home or business, in most circumstances. Life insurance can provide a solution to this problem, by allowing the client to give the monetary value of an asset — in cash — to one heir, while leaving the asset itself to another heir.
In other words, rather than liquidating the asset and distributing the cash amongst each person in the client’s family, life insurance can provide a cash value equal to that of the asset itself. A family business owner can therefore give a business to one of his or her children, while also giving the value of the business (in cash) to the children uninterested in running the company. An insurance policy that offers a cash alternative to certain assets can help the client balance out complexities in financial planning — and give the client a clearer view of how to organize the future.
2. Protecting a Business with COLI
For those who run a business, the life insurance “cash value” generated from the client’s long-term investments can sometimes pay the premiums on a corporate-owned life insurance policy, or COLI. For decades, commercial banks have been purchasing key-person life insurance on executive individuals — with benefits payable to the organization and/or the family of the employee, upon death. Now, corporations and non-profits can achieve the same benefits.
COLI policies can give businesses the opportunity to fund benefit plan expenses, while increasing net income for the company overall. For instance, companies that have substantial costs to pay out for group life, medical, and other insurance plans can finance these costs with COLI.
Many business owners look to enhance and protect their investments with COLI, because it can earn a competitive after-tax yield when compared to other investments, act as a hedge against benefit liabilities, match the long-term nature of benefit expenses, and more. COLI death benefits can even help the company recover the costs of the plan over the long-term.
While these policies can perform in a similar way to individually-owned life insurance policies, corporate packages can offer several advantages that other policies simply cannot match while promoting growth and limiting risk.
3. Accessing Personal Loans
We often consider taxes to be an inescapable part of life. However, life insurance is one of the few products that can offer useful ways to sidestep certain taxes. Many life insurance policies offer owners a tax-free solution to their financial needs, upon the insured’s death. What’s more, while the client is living, it’s sometimes possible to take tax-free loans from the cash value of a policy.
When the client takes out a life insurance policy, the client can begin to accumulate “cash value.” It is possible, in certain circumstances, to access this value using loans and withdrawals. Though the client should expect to pay interest on these loans — just as the client would with a loan from a traditional bank — the client will not pay taxes on the money you receive.
In certain policies, the interest rate on the withdrawal from the client’s life insurance cash value is lower than a typical bank loan. However, the client’s policy-provider may ask the client to use the death benefit as collateral. This means that if the client dies before the client repays the loan, the client’s death benefit will fall by the amount outstanding.
4. Replacing Essential Income
As the client moves through life, the client will likely accumulate a range of expenses — from large debts like mortgages and loans, to smaller emergency payments, like medical bills. If the client is struggling to pay for these expenses, the client may be able to use withdrawals from the client’s life insurance cash value as a source of additional income. Some financial planners recommend using life insurance to cover estate taxes so their other investments can continue to thrive, unimpeded by taxes, well beyond the death of the insured.
Even if client is still working, the client’s life insurance policy can offer a source of much-needed additional wealth in unexpected situations. For instance, as people today are living and working longer than previous generations, it’s important to think about how clients will take care of themselves if they suffer from a long-term illness. On the other hand, clients may find that they suddenly need additional cash for child care, or the long-term care of a relative.
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In addition to the tax-free access to your cash value, some insurance policies offer an added provision called a “rider,” which can trigger some of the death benefit to be paid out while the insured is still living, under certain circumstances, such as a critical illness. The funds are available to use for any reason.
5. Legacy Planning
Finally, whether the client is looking for a way to maintain client’s business after the client passes away, or to ensure the client’s loved ones receive the care and assistance they need when the client is gone, life insurance can play a big part in planning the client’s legacy.
As a tax-free source of money, the client can use your life insurance value to pay for charitable contributions — allowing the client to have a long-term impact on an important cause. Or, use it to pay off taxes, debts, and other expenses that might make the future difficult for the client’s family. Although many people think about providing an income for their heirs, or paying funeral expenses, as the fundamental purpose for a life insurance policy; they may forget about using that cash to fund new opportunities for their loved ones.
Legacy planning with life insurance may mean that if anything happens to the client, the client’schildren can still go to college without the burden of debt. Death benefits can pay for tuition, giving the client peace of mind of knowing that the client can still help loved ones accomplish their dreams.
The True Value of Life Insurance Policies
The primary purpose of a life insurance policy is to offer a source of relief for the client’s family after the client passes away. However, it’s important to remember that life insurance can also act as a flexible financial tool — perfect for leveraging a range of solutions to common problems.
From giving the client the freedom to maximize the client’s benefits after retirement with additional resources to a standard pension, to helping the client plan for the future, or improve the profits of the client’s business, a well-planned life insurance policy can be a crucial financial strategy. Don’t forget to encourage your clients to examine life insurance opportunities from all angles, to determine what’s best for them, their families and their future.
— Read How to sell universal life to the middle market on ThinkAdvisor.