Considerations for using life insurance as part of a strategic wealth management plan

Considerations for using life insurance as part of a strategic wealth management plan

Life insurance provides the ones you love with a tax-free death benefit upon your death. When properly designed and funded, permanent life insurance can also be an asset for enhancing retirement income in a tax-advantaged vehicle, providing an additional stream of income if needed.

It also provides flexibility to access the policy’s cash value with tax-favored distributions

The cash value inside a permanent life insurance policy grows tax-deferred, providing an option to build assets in a tax-favorable manner. Simply stated, it allows you to tap into potential cash value by way of tax-favored loans and withdrawals. For individuals who have maxed out their retirement contributions beyond the limits of traditional qualified retirement plans, this can be a viable solution for helping to supplement income in retirement, but a loan will also reduce the value of the insurance policy by the amount of the outstanding loan and any amount borrowed exceeding the cash value will be taxed because those funds are investment gains.

Above certain amounts, the U.S. government imposes an estate tax on the transfer of property upon death. In addition, many states impose a state-level estate or inheritance tax. These taxes must be paid soon after death. For high-net-worth individuals with assets such as a business or real estate, it isn’t always possible or practical for beneficiaries to quickly sell and transform these illiquid assets into cash. Life insurance is an asset that can provide immediate estate liquidity to help cover estate taxes.

Another estate planning benefit that permanent life insurance can provide centers on estate equalization and distribution. When determining how much heirs will receive and what form the inheritance will take, life insurance can help by dividing assets equally among heirs.

Permanent life insurance is an efficient way to maximize the distribution of assets to a spouse, child, or charity. Combined with the protection of a will or trust, life insurance can help increase the amount you pass onto heirs and organizations. In addition, if you anticipate that income and estate taxes will substantially increase in the near future, permanent life insurance will allow you to transfer wealth into a shelter that protects your assets from higher taxation.

Poor market performance could substantially reduce an inheritance earmarked for loved ones. By directing a small percent of your net worth or income each year into a life insurance policy, you can better hedge against an underperforming market, stabilizing wealth and passing more assets to beneficiaries in a tax-efficient way. Over time, the leverage offered by life insurance may be reduced as the non-life insurance assets grow and compound.

In addition to helping fund long-term care costs with a hybrid life/LTCI policy, the accelerated death benefit rider included in some life insurance policies will allow you to receive a tax-free advance on your life insurance death benefit while you are still alive. Depending on the type of policy you have, you may be able to receive an advance on your life insurance policy’s death benefit if you are deemed terminally ill https://cashcentralpaydayloans.com/payday-loans-wa/, have a life-threatening diagnosis, are permanently confined to a nursing home and are incapable of performing two of the six activities of daily living, or if you need long-term care services for an extended amount of time. In addition, some permanent life insurance policies offer an optional LTCI rider that allows you to set aside accumulated assets in the policy – essentially self-insuring your future long-term care needs.

Preserving assets: The tax benefits of permanent life insurance

A well-designed tax planning strategy should help reduce taxes while you are alive and after your death. Permanent life insurance can be an effective tool for helping to solve specific tax-related challenges.

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