How Life Insurance Can Impact Your Financial Future

It is widely agreed that getting life insurance is a good idea. However, it’s not on everyone’s list of priorities to get to. 

This is especially true for younger people. According to recent research, the best time to get life insurance is often when you’re younger. And, yet, only 1 in 2 millennials currently have life insurance. 

There are many reasons why it’s important to get life insurance and many ways it can impact your financial future for the better. Some of these benefits are more widely known than others. In this article, we will go through the top benefits of having life insurance that you need to be aware of. 

7 Benefits of Life Insurance 

1. Provides financial security for loved ones  

2. Offers a flexible, tax-efficient savings vehicle 

3. Aids strategic wealth transfer 

4. Provides retirement income 

5. Can act as emergency funds 

6. Can be used as a succession planning tool

7. Helpful for passing on the business 

1. Provides Financial Security for Loved Ones

The most widely known benefit of life insurance is that it offers a death benefit which is essentially a safety net for your loved ones should you pass away. This is an important benefit, especially if you are leaving behind children who are too young to take care of themselves. 

Your death could bring up several expenses, so having the financial cushion of a death benefit will allow your loved ones to cover these costs and preserve your wealth. 

2. Offers a Flexible, Tax-Efficient Savings Vehicle 

With some life insurance policies such as whole life insurance or universal life insurance, you can opt for a cash value component. This is useful as it serves as a kind of tax-advantaged savings account that earns interest over time.

This is a living benefit, as the policyholder can withdraw funds while alive. These withdrawals are often tax free provided you don't exceed the amount you contribute through premiums. You can also borrow against a cash value component without paying taxes on the loan. 

The premiums are normally higher for this kind of policy. These higher premiums cover a contribution to the death benefit, insurers fees, and the cash value element. The cash value of life insurance earns interest as it builds over time and taxes are deferred on the accumulated earnings. 

It’s important to know that if you do make withdrawals this can impact your death benefit, however, this will depend on the amount you withdraw. 

3. Aids Strategic Wealth Transfer 

If you are strategic with your life insurance, you can use it as a way to reduce the estate taxes that your heirs could potentially face when they receive their inheritance. 

Life insurance is a great tax-efficient way to transfer wealth to your beneficiaries. In 2024 if your estate exceeds $13.61 million, your heirs could be looking at a large tax bill if you were to pass away. The danger with this is that it can then end up eating into their inheritance and force them to sell properties or assets that they don’t want to. 

A life insurance death benefit can provide the necessary liquidity to help cover these taxes. The creation of Irrevocable Life Insurance Trusts (ILIT) alongside life insurance can also help minimize estate taxes. 

If you wish to make charitable contributions, you can also do this through life insurance while also making the most of the tax breaks that come with this type of giving. 

4. Provides Retirement Income 

If you do have a life insurance policy with a cash value element, you can use it to supplement your retirement income. Life insurance can serve as a steady source of retirement funds. 

You can also use your cash value to cover your premiums. This is particularly useful in retirement as you will then not need to use your retirement savings to pay your life insurance.  

5. Can Act as Emergency Funds 

Again, with a cash value component, life insurance can provide extra funds in the case of unforeseen medical needs or other unexpected events that may impact your financial situation.  

This could be in the form of withdrawals or borrowing money against your policy. 

6. Can Be Used as a Succession Planning Tool

Business owners can even use their life insurance as a succession planning tool. This can help you protect your business should you or a key member of the team pass away unexpectedly. 

A business life insurance policy can help cover your business debt and protect those left behind. You can also take out a key person's life insurance policy.

In addition to this, life insurance can be used to facilitate buy-sell agreements where a designated person and/or people, normally partners, have first rights to buy the business should the other partner pass away. 

Life insurance helps here because it provides the remaining partners with a death penalty that then allows them to buy out the deceased partners’ share. 

7. Helpful for Passing on the Business

Life insurance can also be used as a way to equalize your estate. 

This is useful because you may want to pass your business intact on to one or more heirs. Yet you don’t want your other heirs to miss out through their lessened involvement in the business. 

You can use your life insurance policy to provide liquidity so that while some heirs are not given the business, they are given their equal or what you deem to be their fair share. 

Takeaways  

Life insurance is essential for all and not just because of the death benefit. When carefully considered, life insurance can offer financial benefits to you while living, and considerable benefits to your loved ones after you have gone. 

At Entrust Wealth Partners we can offer guidance on how to improve your life insurance policy and how it can better fit into your wider wealth plan. Reach out to your advisor today or contact our office at (860) 838-3730 to start talking.