The Living Benefits of Life Insurance
There is a widespread misconception that life insurance is only useful for its death benefit. While the death benefit is the essential component of life insurance, there are many ways that permanent life insurance can be a valuable resource for you over the course of your life, while you are alive. We call these the “living benefits of life insurance,” and they can be significant.
The secret behind these living benefits is cash. Permanent life insurance is a tremendous vehicle for accumulating cash value. The growth of a policy’s cash value is guaranteed, laid out in the terms of the initial contract. Few things in life have that sort of guarantee behind them. The stock market certainly doesn’t. In today’s low-rate environment, even banks aren’t a guaranteed way to grow your money.
Cash is king, as we all know. Having cash at your disposal enables you do to so much more than you might otherwise be able to do – put a down payment on a house, launch a business, send a kid to school, weather a difficult illness, or even retire. So much of the financial stress people feel in their lives revolves around having (or not having) the cash they need.
But what people actually want is access to cash. You want to know it’s there if you need it, but you don’t necessarily need it stuffed in your mattress. You want it working for you in the meantime, in an investment growing at six to eight percent a year, even while you can get access to it with a simple phone call. That is what life insurance can do for you.
I like to use analogies with clients. One analogy I use to describe the difference between having cash and having access to cash involves driving over the bridge between Bellevue and Seattle, where I live. Most people feel comfortable driving the speed limit across this bridge, which is 60 miles an hour. Now, imagine that the guardrails on the bridge didn’t exist. One wrong move and you might careen over the edge of the bridge and into the water hundreds of feet below. Would you feel comfortable driving 60 miles an hour without those guardrails? Of course not. You would drive at 25 or 30 miles an hour and you would stick as close to the center of the bridge as possible.
Few of us ever scrape the guardrails on the bridges we drive across, but knowing the guard rails are there allows us to drive faster on the freeway. The same is true of the cash value of a life insurance policy. We may not plan to touch it, but knowing it is there enables us to move more confidently through life.
While the cash value of a permanent life insurance policy is yours to use however you want, there are specific strategies that people tend to use it for:
To Fund Retirement
The stock market can be a great long-term investment, but it can cause real problems if you are depending on that money in the short term. If you retire at 60, there’s a good chance you might live to age 95. There are not a lot of guarantees that you can make in financial planning, but I can guarantee you that, over that 35 years, there are likely to be up years and down years in the stock market. You need to have a strategy for those down years, some place where your money doesn’t lose value, so you aren’t forced to sell your investments when the market is down, simply because you need the cash. For example, if you had to draw from your investment portfolio the year after 2008, when the market was down 37 percent, you would have missed the recovery in the market that happened shortly after. Not only did you have to sell low, you missed the opportunity that followed afterwards.
Saving for College
I have several clients using their life insurance policies as a way to save for college.
By using the cash value of life insurance as a vehicle for college savings, you create an asset that can be repurposed if your child gets a full scholarship to college, or if they decide that college is not for them. Nor does the cash value of life insurance count against the student when it comes to filling out the FAFSA and CSS forms for college financial aid.
Another bonus of using life insurance to save for college is you’re creating self-completing coverage. Your regular contributions grow, and the resulting cash value can be used to pay for college. But, if the worst happens, and the covered parent dies, the death benefit then pays for college. No matter what happens, college is paid for.
Starting a Business
There is a time-honored tradition of using the cash value of life insurance to start a business. If Walt Disney can do it to build Disneyland, you can do it to build your dreams. Few banks will lend you the money to start a business, as most business loans are backed by the revenue stream of the business. Instead, people oftentimes look to tap the cash value of their life insurance, which can be used, no questions asked, for any purpose. Personally, I haven’t had any of my clients use their life insurance to actually start a business, but I’ve definitely had a lot of clients who have created an account with the idea of using it as a source of capital for starting a business 10 or 15 years from now.
For Strategic Wealth Building
I’ve heard many stories from my clients, who had cash value in their life insurance policy they had no intent of using in for the foreseeable future, only to have opportunities knock on their doors. Maybe they found their dream house and needed access to a down payment. Cash value life insurance is a great place to pull from.
Another scenario is where clients actually didn’t pull the money from their policy’s cash value, but having the option gave them flexibility. I had a phone call recently with a client who was buying a car and wanted to know if he should use his cash value for that. My response was that if he could borrow money from the dealership at one percent interest, while the money in his life insurance was growing in the six, seven, sometimes even eight percent range, he should take the car loan. That’s arbitrage, where you are making other people’s money work for you. That’s the difference between strategic wealth building and just hoping.
These are just some of the many living benefits of life insurance. Most people know little about the living benefits of life insurance, which means they are overlooking one of the most powerful financial tools available to them. If you want to learn more about whether any of these strategies would be appropriate for your circumstances, I encourage you to get in touch with your financial adviser.
All guarantees are based on the claims paying ability of the issuer.
Life insurance policies contain exclusions, limitations, reductions of benefits, and certain requirements to keep them in force. Products and features are subject to certain eligibility requirements and/or restrictions, additional premium requirements, and/or minimum or maximum coverage amounts. Availability and rider provisions vary by state. Accessing cash values may result in surrender fees and charges, may require additional premium payments to maintain coverage, and will reduce the death benefit and policy values. Loans and other policy withdrawals may be taxable under certain circumstances.