We originally published this piece in 2016 and recently included new updates for 2019.
More and more people are interested in the wealth creation process as the retirement age keeps increasing. They want to avoid working well into their 60's and beyond. While there are several active ways to increase wealth, one passive area that many people overlook is sitting right in front of their faces: life insurance. While its primary purpose is to provide ample support to dependents or beneficiaries, it also makes for a very successful wealth-building tool when setup correctly.
With 4o% of Americans lacking any form of coverage, it's safe to say it's an untapped market. It's important to distinguish that only whole life policies will yield the results you're looking for. Those with term structure don't carry the same benefits. They simply pay out when you pass away. Now let's take a look at how to get started with obtaining life insurance.
The optimal time to look into getting life insurance is when you are young, healthy, and can afford it. We can't predict the future and even though you are healthy today, you could experience medical issues tomorrow. This will then make you uninsurable or more expensive to insure. Therefore, when you meet with a financial adviser, be sure to broach the topic of life insurance and which type is best for you.
The younger and healthier you are, the better your insurance rates will be. As you get older, if your insurance needs change, speak with your agent about increasing your current coverage or getting additional policies to meet your family needs.
There is a savings component (aka cash value) to whole life policies which is one of the most attractive features of this financial tool. Like your bank account, whole life policies come with guaranteed protections that secure your investment and the payouts. Your policy and its value remain stable regardless of how volatile the market is on any given day. This is important to have for wealth creation.
The more payments you make on your life insurance policy, the greater the value increases. Each policy is set up with monthly, semi-annual or annual premiums. The premium is divided three ways with portions distributed to the death benefit, administration fund and investment fund. The majority of the premium does go towards the investment fund. Over time, wealth creation is taking place with investments flourishing along with the value of the policy.
The money invested in a whole life policy is tax deferred. This is one of its biggest perks. It's not counted as income, which helps alleviate the burden for the holder and eventually the recipient. This means that any growth on the funds is not subject to taxes and results in more cash value.
Additionally, the death benefit is nontaxable for the most part. There is a chance estate taxes may factor in. Policyholders can set up a structure that pays the estate taxes directly from the proceeds before the benefit is distributed to the specified beneficiaries.
Unlike term policies that carry no cash value, whole life policies not only carry a balance, but you can borrow against the policy as it accumulates. Some people set it up so that there's a large balance from the beginning, and as mentioned previously, it's all tax-free. You can use the money to pay off other debts with interest-free payments, helping to improve your overall credit score without taking on a debt-consolidation loan. This leads to more wealth creation and gives you better buying power.
Another benefit to having the cash value available is that you can use the funds to create a wealth of diverse investments. If you're looking to get into real estate investing, for example, you can borrow against the cash value to diversify your portfolio. Many people use the life insurance policy as their own personal bank account, which helps to make the most of the money.
Imagine you were unable to work and bring in money after being diagnosed with a chronic or terminal illness. The first concern is how will you be able to support those who depend on you? Then you have to worry about how to afford the medical expenses that follow.
When setting up your life insurance, many companies give you the option to add on an "accelerated death benefit rider." This gives you the opportunity to withdraw the majority of the policy before your death. You can then use the money to live instead of trying to work while sick. This helps alleviate stress and makes life simpler in the meantime. The rest of the death benefit is still available and will be distributed to your beneficiaries after you pass away
While many people age gracefully without the need for increased care, some find themselves visiting with the doctors on a regular basis. This is particularly true if you have a family history of illnesses that you're at risk for. In the end, you might even need long-term care or assisted living services that prove to be quite costly. Most of these expenses are not covered fully by insurance so you would have to pay this out of your own pocket. With that being said, many whole life policies allow the money to be put towards these necessary expenses. This protects your other assets, leaving more behind for your loved ones in the event of your death.
Perhaps the main reason to set up a viable life insurance policy is to guarantee that you'll have one later in life. It's easy to put the process off thinking that you can always get one later on down the road. Unfortunately, this isn't always true. Health circumstances can change in as little as six months to a year. You can be outright denied for a whole life or term policy if you have a scare or elevated risk for certain diseases.
The best time to sign up for life insurance is when you're young and active and in good health. To be approved for a whole life policy, you have to undergo testing to verify that you're in good health. Planning ahead not only protects and provides for your loved ones, but it also helps to increase your wealth today. When set up correctly, it could serve as a fruitful investment that returns itself many times over. Speak with a qualified adviser to learn how to get started.
You can purchase life insurance directly from an insurance broker, insurance company or through a licensed agent. If you decide to contact a broker, you will be able to get quotes from different companies so you can compare coverage and prices. However, if you have an agent you trust, start there. Just note, most agents are associated with one company and may only be able to sell you insurance from that company. If they are independent agents, they may have access to several companies.
Prior to purchasing insurance from anyone, always check out the company. There are five rating agencies out there that rate the financial strength of an insurance company. Make sure the company you decide to go with has an A or A+ rating. When it comes to choosing a permanent or term life insurance, it’s best to seek the advice of a professional.
Retirement is a popular topic in personal finance and for good reason. People are living longer and they want to ensure they don't have to continue working a full time job to pay the bills. For this reason, the wealth creation process is on their radar. As mentioned above, life insurance is an overlooked component that can help create wealth over time so you enter your golden years with financial confidence.