Life Insurance: Protecting Today's Assets and Tomorrow's Heirs
May 13, 2016
Many people obtain life insurance when they first have children and then forget about it, except for when the premium bill comes due. But an effective financial plan includes reexamining your life insurance needs continually throughout your life to ensure the assets you've accumulated are protected and to provide additional opportunities to create wealth.
Estimate Your Needs
Before assessing your insurance needs, look at your annual income. Then tack on one-time expenses, such as a mortgage, debt, and college tuition bills for your children. Remember to consider the amount you still need to invest to fund your retirement. Also factor in your final costs -- estate taxes, potential uninsured medical costs, and funeral expenses.
Another factor to consider when purchasing life insurance is whether to also use it to help complement your savings efforts. Because some types of life insurance have a tax-deferred savings component, it may offer you an additional way to save for the future.
Choices, Choices
Next, figure out which type of life insurance is best for you. Many younger people opt for term insurance because of its relatively inexpensive cost. The policy is written for a set period of time and may be renewed (although the premiums usually increase each time you renew).
Mature investors may wish to consider a permanent policy, which combines life insurance coverage with a tax-deferred savings vehicle and is generally more expensive than term. You pay the premiums and receive a fixed death benefit that might potentially rise depending on the policy's cash value. Part of each premium accrues as cash value, and you may be able to borrow against the accumulated cash tax free.
In addition to the broad categories of term and permanent, there are a variety of other life insurance choices available -- any of which might be appropriate for your situation.
Estate Planning
Some people use life insurance to fund an irrevocable life insurance trust to either create or transfer wealth for future generations, fund estate tax liabilities, or to help manage small business succession issues. This type of trust helps to preserve assets because, if drafted and executed properly, the death benefit is not subject to estate taxes. It also offers the benefit of flexibility. For example, it may be set up to allow a surviving spouse to receive regular payments from the insurance policy or to set aside assets for a minor. Drawbacks are that you lose control over the policy, insurance premiums could be expensive, and you'll most likely pay legal fees to create and maintain the trust.
Seek Qualified Help
Different life insurance policies and their costs, terms, and restrictions can be confusing. Consider working with a financial or insurance professional to determine which type of life insurance best fits your needs. At a minimum, be sure to include your life insurance needs whenever you review your overall financial planning needs -- regardless of your age.
Connect with a wealth advisor
No matter where you are in life, we can help. Get started with one of our experts today. Contact us at 800-582-1076 or submit an online form.
This document is intended as a broad overview of some of the services provided to certain types of Washington Trust Wealth Management clients. This material is presented solely for informational purposes, and nothing herein constitutes investment, legal, accounting, actuarial or tax advice. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. Please consult with a financial counselor, an attorney or tax professional regarding your specific financial, legal or tax situation. No recommendation or advice is being given in this presentation as to whether any investment or fund is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors, or markets identified and described were, or will be, profitable.
Any views or opinions expressed are those of Washington Trust Wealth Management and are subject to change based on product changes, market, and other conditions. All information is current as of the date of this material and is subject to change without notice. This document, and the information contained herein, is not, and does not constitute, a public or retail offer to buy, sell, or hold a security or a public or retail solicitation of an offer to buy, sell, or hold, any fund, units or shares of any fund, security or other instrument, or to participate in any investment strategy, or an offer to render any wealth management services. Past Performance is No Guarantee of Future Results.
It is important to remember that investing entails risk. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions. Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, and regulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. The value of a portfolio will fluctuate based on market conditions and the value of the underlying securities. Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment loss. Investors should contact a tax advisor regarding the suitability of tax-exempt investments in their portfolio.