Most people buy life insurance policies to protect their kids or spouse in the case of their untimely death. As kids grow up and become independent and both spouses retire and become less reliant on income from wages, it may seem as though the reasons for purchasing a life insurance policy have disappeared. A person may consider dropping the policy in order to save on premiums, but financial experts warn that this could be a mistake.
Life Insurance as Wealth Management
An old life insurance policy can be an important tool in wealth management and should be treated as an asset or investment. Whole life policies can be used for a variety of purposes beyond the traditional after-death expenses. Many policies carry a cash value that can be withdrawn and used to cover current expenses or needs. It may also be possible to borrow against the value of the policy to have immediate access to money. Borrowed money may incur interest rate charges, but it is much easier to acquire compared to a regular loan.
The percentages on older, fixed-rate policies can also be very attractive from an investment standpoint. Life insurance policies can be used as investments with calculated rates of return. Just like when shopping for car insurance quotes, the terms and percentages of your life insurance policy are important to track and compare with the modern market. If an older policy lapses, it may be impossible to get such favorable rates later, making it a better financial choice to hold into the policy.
Even if both spouses are retired and getting benefits such as social security and Medicare, it is likely that one spouse will outlive the other. When a spouse dies, there are important financial considerations for the surviving spouse. Social security payments will be reduced, and the spouse may lose access to retirement benefits. In most cases, the reduction in income is greater than the reduction in household expenses or medical expenses. A life insurance policy can provide a safety net to cover this loss of income for the remainder of the surviving spouse’s life.
Final Expenses and Taxes
Death can be surprisingly expensive. The average funeral may cost as much as $10,000 when burial plots, headstones and other such expenses are factored in. Government-provided death benefits cover only a fraction of this. Children or relatives will be forced to cover this cost or sell portions of the estate to make up the money if life insurance isn’t available. This can be a major loss for the estate because assets may be sold or auctioned at reduced prices to make money quickly.
Many estates will owe estate or inheritance taxes to the government. If a person doesn’t have a solid estate plan, a good chunk of its value could be taxed away. Heirs are again left on the hook for this money. They probably won’t have to pay out of pocket themselves, but the tax will be extracted from the value of the estate somehow. This usually involves selling or auctioning assets at reduced prices and losing assets heirs may want to keep.
Since life insurance benefits are usually exempt from taxation when paid to a beneficiary, this tax-exempt income can be used to pay the estate or inheritance tax, avoiding any loss of value in the estate.
Selling or Donating the Policy
A more recent practice involves getting cash out of a policy by selling it or donating it to a charity. A policy can be sold and the buyer takes over the remaining premium payments and receives the entire death benefit at the end. In exchange, the policy holder gets an early cash out on the policy and doesn’t have to worry about premiums anymore. This can be much more advantageous than simply canceling the policy or letting it lapse.
A policy can be donated to charity by naming a charity as the beneficiary. This may have tax deduction advantages, which translates into an immediate money-saving opportunity for the policyholder. They won’t be able to claim the death benefit, but they can get an early tax break.
There are many ways to make financial use of an insurance policy. Even if the initial reasons for purchasing the policy are outdated, the policy still represents an important asset and financial tool that should not be wasted. Policy terms, uses and limitations vary, so it is a good idea to speak to a financial advisor or insurance expert when deciding how a policy fits into the greater estate plan.