Great life insurance strategies to help keep you financially stable
Life insurance is one of those topics many of us like to avoid. No one likes to think about their own death, and the idea of having a policy that will provide for your family after you’re gone is just depressing. But what if we told you your life insurance policy can actually help give you the life you want, rather than the death you don’t?
Your life insurance policy can be an amazing tool for growing your wealth and becoming more financially stable. Read on to discover some life insurance strategies that will help you have an amazing financial life.
Let Term Policies Expire
The trick to making term insurance policies work for you is that you have to let them expire. When the term comes to a close, you feel like you should renew that policy. Don’t give into that temptation; let the policy expire and get a new one.
A lot can change in twenty years: kids grow up, you may get married or divorced, and your financial life will change dramatically. Term policies exist to protect you during those times in your life when it makes the most sense. When the term ends, let the policy expire and pick something that works better for your current situation.
Let Cash Value Grow Tax-Deferred
An alternative to term life insurance policies is something called whole-life insurance. As the name implies, these policies last your whole life, and they often accrue significant cash value. This value grows tax-free while it’s held within the policy, and it’s in your best interests to let it do so.
The IRS looks at policy dividends that create cash value as a return on the premiums you’ve paid in. You’ll only have to pay tax on those earnings when they get larger than the premiums you’ve paid on the policy. Until that point, you’re getting free money on the taxes you won’t have to pay.
Reinvest Dividends in Paying Premiums
When you get your dividends from your life insurance policy, it can be very tempting to take that money and buy a new boat/car/vacation home/trip to Spain. But if you’re wanting to improve your financial standing, the best thing to do with these dividends is to reinvest them.
Use whatever money you get from your insurance dividends to pay your premiums. Your policy will begin to pay for itself that way, and you’ll be able to use the money you would have spent paying the premiums to buy the luxuries you want. As your policy continues to accrue value, your policy will eventually begin generating revenue for you, in addition to paying for itself.
Borrow Against Cash Value
When you die, the beneficiaries of your life insurance policy will receive the death benefits on your policy. But they will not receive any of the cash value that has accrued in your policy. One way to make use of that cash value is to borrow against it.
You can take out a loan for less than your cash value and use that value as collateral. You don’t have to pay the loan off as long as the total amount of the loan, including interest, doesn’t exceed the amount of the cash value of your policy. When you die, that value will go to pay off the loan, making sure you get the benefit of that money while you’re alive.
Convert to a Life Annuity
One other way to use your cash value on your life insurance policy is to surrender the policy and convert the cash value to an annuity. As you get older, a life insurance policy makes less and less sense, given that your likelihood of dying of natural causes increases year over year. An annuity can be a good option to provide a secure retirement income and make use of the cash value of your policy.
An annuity pays a specified amount of money to the beneficiary on a regular basis – usually monthly. This can be a fantastic retirement option since you can convert the cash value of your life insurance policy into guaranteed monthly income until your death. The only trick is to make sure you won’t incur a significant tax obligation if you take this course of action.
Start Young
One of the best things you can do to make your life insurance policy financially profitable for you is to start young. For one thing, if you get a whole life policy when you’re young, it will have lots of time to accrue cash value as you age. By the time you’re ready to retire, you could wind up with quite a healthy annuity.
But the other thing that works to your advantage if you get life insurance young is your health. Your chances of dying are significantly lower when you’re younger, so insurance companies are more willing to take a chance on your policy. You can get a much better rate on a policy when you’re twenty than when you’re forty.
Buy in Bulk
As with many other products, buying more life insurance will get you more bang for your buck than buying less. In this case, buying more means buying a life insurance policy with a higher death benefit amount. Buying a life insurance policy with a $500,000 payout is cheaper per thousand dollars than buying a policy with a $300,000 payout.
The trick to making that work is not letting your eyes get too big for your wallet. Yes, it’s nice to see the per-thousand-dollar cost go down and the payout go up. Additionally, it is best to make sure you don’t wind up with a payout so big that you can’t reasonably afford to pay for the policy every year.
Get the Medical Exam
When you’re shopping for life insurance policies, you may notice that some policies are advertised as being a “guaranteed issue” or “simplified issue.” These policies allow you to get life insurance without having to get a medical exam to ensure that you don’t have any underlying health problems. However, these policies tend to be more expensive than policies that require a medical exam.
Getting an “underwritten” policy can save you a lot of money if you’re in good health, and even if you have some minor health issues. We know it’s tedious, but take the time to go get the medical exam done and fill out the paperwork. You’ll be able to get lower premiums and save thousands of dollars in the long run.
Build an Emergency Fund
You may be wondering what you should do with all this money you’re saving from getting a medical exam done. One of the best things you can do with this extra money is to build up an emergency fund. This can help you avoid debt and prevent you from having to dip into your retirement fund.
Ideally, you should have between three and six months’ worth of income saved up. If you get in a car accident, break down, have a medical emergency, or run into other unforeseen circumstances, this fund will cover those costs. Be sure you replenish it if you spend from it, and never dip into it unless you absolutely have to.
Invest the Extra
Another way you can make that saved money from your life insurance policy (or even the dividends from a whole-life policy) work for you is by investing it. Many permanent life insurance policies are already invested, but the insurance agency makes choices about how those investments are managed. You can likely make more money if you invest the extra dividends on your own.
If your dividends are large enough, talk to a brokerage agency about managing your investments. They’ll be able to advise you about which stocks are best to invest in and get you in some long-term investments that will provide you with almost guaranteed growth.
Discover More Life Insurance Strategies
Life insurance can be more than just a boon to your family in the event of your death. If you manage it right, life insurance can provide you with excellent financial stability during your lifetime. The life insurance strategies we discussed can help you make your policies work harder for you.
If you’d like to discover how to become more financially established, check out the rest of our site at Living Wealth. We help you create wealth from debt and expenses so you can gain control of your money and achieve financial significance. Take our free course today and start the path to becoming debt-free.
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What are the different types of whole life insurance policies?
Life insurance is a contract between two parties, the policyholder and the insurer. The policyholder pays a premium to the insurer, and then the insurer offers a benefit when the policyholder dies. The benefit is a sum of money intended to ensure financial security to dependents of the policyholder after their death. In this article, we will look at specific types of life insurance called whole life.
But first, let’s look at life insurance in general and then we will get into types of whole life insurance policies.
Essentially, life insurance provides security. It allows for individuals to have a piece of mind knowing that their family, kin, and other dependents will not face a significant financial burden in the event of their death. Unfortunately, all life insurance policies are not created equal. It is essential to understand which policies allow you to maximize your benefits and suit your individual needs.
Examples of life insurance policies
Examples of life insurance policies include term life, universal life, variable universal life, whole life, and many more. Each policy has advantages and disadvantages. This article’s focus is on whole life insurance.
The insurer for life insurance is often a third-party such as a bank. With whole life insurance, the policyholder has complete ownership. This ownership enables you to have more control of your investment and gives you the flexibility to cater the policy to your personal needs. For example, policyholders can borrow against the premiums you have already paid. You are not limited to waiting until death to have access to your money.
How whole life insurance differs
Whole life insurance also differs from other policies in that it offers a fixed benefit. (This is what Wikipedia says about it.) With some life insurance policies, you pay into it with the hope that there will be a significant amount of money received. However, the exact amount you will receive upon death and/or at the end of the policy may is not guaranteed, nor is it known beforehand. Whole life insurance eliminates the guesswork by providing a guaranteed cash value that remains the same throughout the contract, providing peace of mind. It also allows for accurate planning.
Another perk of a whole life insurance policy is that the money grows tax-free. This means the growth of the policy is not dependent on the IRS and the federal government. There are many advantages to having a whole life policy. However, there are some downsides. To reap these benefits, you are often required to pay higher premiums and extra fees.
Additionally, it is a more complicated option, which may be hard to benefit from without the help of a professional. Nonetheless, this policy has been around for over 100 years and is proven to have worked for many people. It gives you control of your contract and ensures you are reaping the benefits instead of a third-party insurer. Therefore, it can be an excellent investment to get you towards financial freedom and security.
All whole life insurance policies are not created equally. There is a wide variety of options to suit your individual needs. Below is a deeper dive into the different types of whole life policies.
Types of Whole Life Insurance Policies:
Let’s look at the types of whole life insurance policies available in the marketplace:
Non-participating Whole Life
A non-participating whole life policy is one of the more common policies people choose. In this policy, you are not participating in investment activities. You have a fixed death benefit, guaranteed cash value, and level premiums. It is a lower cost and lower risk, but it may not see as much growth as other options.
Participating Whole Life
A participating whole life policy, you are participating in investment activities through dividends. A dividend is a sum of money given to members of the company and/or shareholders. Essentially, when the investments do well, the policyholder receives more money. Premiums are often higher with the policy because of the potential for growth. However, it is a bit of a higher risk because dividends are not guaranteed.
Single-Premium Whole Life
In this policy, you pay a lump sum amount to purchase the policy upfront. This is often lower risk because you are deciding how much you would like to have in your death benefit; it is dependent on how much you invest initially. The option has excellent growth potential. The earlier it is purchased, the longer it can have to build-up. A downside to this option is the high cost, and you are charged more substantial fees for canceling the policy within the first few years.
Level Premium Whole Life
Level Premium Whole Life is also a common policy choice. In this policy, premiums are calculated based on the entire duration of the contract or the policyholder’s life. This option offers stability and consistency. The premiums are the same every pay period until the policyholder dies. Additionally, you have the option to pay for a shorter term (ex. 10 years) to fit your needs. It is also a lower risk because the premium price does not change unless specified by the policyholder.
Indeterminate Premium Whole Life
In this policy, the premium payment varies and is based on the performance and projections of investments. If they are doing well, then the policyholder will pay a lower premium. When they are not doing well, premiums go up. However, the premium cost can not exceed the maximum amount. The amount is set at the time the policy is purchased.
Whole Life Economic
This policy works similarly to participating whole life insurance through the use of dividends. However, dividends are used to buy additional life insurance. A benefit of this option is that benefits can grow if performance and projections are doing well. However, it can also decrease if they are not doing well.
Living Wealth tips for developing a whole life insurance policy
Living Wealth believes that to maximize the benefits of your whole life policy; you should purchase the policy with a mutual company and add a paid-up addition (PUA) rider to the policy. A mutual company is one that is not controlled by the stock market. When you put your policy into the hand of a stock company, you do not have a say in how your money is used. Additionally, the extra money made through the investments goes to the shareholders of the company. In a mutual company, the owner is the one who buys the policy – you. This means you can participate directly in the profits and dividends. Moreover, the profits go to you instead of the stockholders.
A paid-up addition (PUA) rider allows for the policyholder to add benefits to the existing policy. This is achieved by buying additional coverage with dividends. By doing this, you are increasing the potential for growth as PUA riders can also increase in value as time goes on. Essentially this helps you add value and cash to an existing policy.
Overall, whether you take these tips or choose to purchase one of the existing types discussed above, whole life insurance is a good option for many. It is generally higher cost, but this price point allows for greater stability, control, flexibility, and potential for growth. This provides peace of mind knowing that your dependents will be taken care of after your death.
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