We recently met new clients that owned 6 properties and not a ton of financial assets. The husband ran his own construction business and the wife helped with bookkeeping while looking after their 3 kids. They had a good income, but there was a risk to the family’s standard of living if something happened to him as the main bread earner as well as a large tax liability when the couple passed away.
At that point, 50% of the gains on their 5 properties (excluding their home) would be taxable. So, they are looking at a 2-prong life insurance strategy.
Some temporary coverage for the next 10 years until the kids are grown and the mortgages are paid off and some permanent coverage that increases in value to cover their future tax liability.
Purchasing life insurance is a smart financial decision, but it’s also an emotional one. No one wants to think about death but if you take steps now, you can be sure to protect your family’s financial future should the unexpected happen.
The most common types of life insurance are permanent and term.
Permanent policies typically have two components: a cash value accumulation and a death benefit. A permanent policy is designed to be kept for your lifetime. With permanent life insurance, you typically pay higher premiums compared to a term policy in the short term but you’re building equity (a cash value) and you have coverage for your lifetime. You can also pay it off sooner and then the costs come out of the cash value, while it continues to grow.
A term life insurance policy pays an amount, called a death benefit if you, as the insured, die within a specified period. Because term insurance is designed to be kept for a shorter amount of time it’s one of the most affordable life insurance options. However, unlike permanent policies, there is no cash value, but you may have the option to convert your term policy to a permanent policy in the future.
So how can life insurance protect your family? It can help in the following 5 ways:
1. Provide Financial Well Being
If your family depends on your income to cover the monthly bills and day-to-day expenses, life insurance can help replace the loss of your income. The death benefit can also be used to pay off debts like a mortgage, car loans and credit cards – taking some of the financial stress away. If you have young children, it gives your loved ones more flexibility to stay home or spend more time with them.
2. Pay for a child’s post-secondary education
Your policy’s death benefit can be used for many things including paying for a child’s education. Additionally, with a policy that accumulates a cash value such as permanent life insurance, you can generally access the cash value through a policy loan or withdrawal while you’re still living which could help cover these costs.
3. Keep the business in the family
If you own a business, planning for the future includes developing and updating your succession plan to help ensure the business passes successfully to the next generation. Certain taxes may apply when passing a family business to the next generation. Life insurance can help cover those costs, easing the tax burden on the future business owner and other family members. It can also be used to equalize an estate if you leave your business to one child and want to be sure the other child(ren) receives an equivalent inheritance.
4. Enhance your legacy
Do you have a favorite charity? Life insurance is a great tool for increasing what you’d give to a charity that is important to you. You have the opportunity to make a larger gift than might otherwise be possible by designating your go-to charity as a beneficiary on your life insurance policy.
5. Supplement Retirement Income
If you purchase permanent life insurance, you’ll generally have access to your policy’s cash value through a policy loan or withdrawal or a collateral loan at a bank. You could use the money for emergencies, retirement income, changes to your health, and more. Some types of life insurance such as permanent life insurance build a cash value over time that can be used as a form of supplemental income in retirement.
Life insurance is an important element of your overall financial well-being. Expenses for your family can add up quickly if you die while still having a mortgage or young children. As you get older life insurance can provide different benefits such as enhancing your legacy, retirement income or covering the costs from your disposition of all your assets. With life insurance, you gain peace of mind knowing your family will be protected just like our new clients!