Join Alex Barnes of Cornerstone Wealth and Sam Rocke of Ash Brokerage for a webinar as we discuss life insurance planning.
Life insurance is a crucial component of financial planning, offering protection and peace of mind for both individuals and businesses. Understanding the different types of life insurance and their respective benefits and drawbacks is essential for making informed decisions. This article will delve into the fundamentals of life insurance, including personal and business uses, compare term and permanent insurance, explore universal and whole life insurance, discuss permanent policy riders, and provide an overview of basic taxation.
Fundamentals of Life Insurance: Personal and Business Uses
Personal Uses
Life insurance primarily serves to provide financial security for your loved ones in the event of your untimely death. The benefits can cover funeral expenses, outstanding debts, mortgage payments, and everyday living costs. It ensures that your dependents maintain their standard of living and meet future financial goals, such as education expenses. Additionally, life insurance can serve as a savings and investment tool, particularly with permanent policies that build cash value over time.
Business Uses
For businesses, life insurance is a strategic tool to protect against financial loss due to the death of a key employee or owner. Key person insurance helps businesses cover the costs associated with finding and training a replacement, as well as compensating for lost revenue. Buy-sell agreements funded by life insurance enable remaining partners to buy out the deceased partner’s share, ensuring business continuity. Executive bonus plans and deferred compensation plans also utilize life insurance to attract and retain key talent.
"As a financial advisor, I have witnessed firsthand the transformative impact of well-structured life insurance policies on both personal and business financial stability. It's not just about safeguarding against unforeseen events; it's about strategically planning for a secure future. Whether you're a young professional starting your financial journey, a parent ensuring your children’s educational needs are met, or a business owner protecting your company’s longevity, understanding the nuances of life insurance can make a significant difference. By staying informed and making educated decisions, you can leverage life insurance as a powerful tool to achieve long-term financial goals and peace of mind."
-Alex Barnes, Wealth Advisor - Cornerstone Wealth
Term Insurance vs. Permanent Insurance
Term Insurance
Term insurance provides coverage for a specified period, typically ranging from 10 to 30 years. If the policyholder dies within the term, the beneficiaries receive the death benefit. Term insurance is known for its affordability and straightforward nature.
Advantages
- Lower Premiums: Term policies are generally more affordable than permanent policies, making them accessible to a wider range of individuals.
- Simplicity: These policies are easy to understand and manage.
Disadvantages
- No Cash Value: Term insurance does not build cash value; it is purely protection-focused.
- Expiry: Once the term expires, coverage ends unless renewed, often at a higher premium due to increased age and potential health issues.
Permanent Insurance
Permanent insurance provides lifelong coverage, as long as premiums are paid. It includes a savings component that builds cash value over time, which can be borrowed against or withdrawn.
Types of Permanent Insurance
- Whole Life Insurance: Offers consistent premiums, a guaranteed death benefit, and cash value growth based on a fixed interest rate.
- Universal Life Insurance: Provides flexible premiums and death benefits, with cash value growth tied to market performance or a guaranteed minimum interest rate.
Universal Life Insurance
Universal Life Insurance (ULI) is a type of permanent life insurance with flexible premiums and adjustable death benefits. The policyholder can vary premium payments within certain limits and can increase or decrease the death benefit. The cash value in ULI grows based on market interest rates or a guaranteed minimum rate, providing a balance between flexibility and potential for growth.
Advantages
- Flexibility: Adjust premiums and death benefits as financial circumstances change.
- Cash Value Growth: Potential for higher returns compared to whole life insurance, depending on market conditions.
Disadvantages
- Complexity: More difficult to understand and manage due to variable components.
- Investment Risk: Cash value growth is subject to market performance, which can be unpredictable.
Whole Life Insurance
Whole Life Insurance offers a fixed premium, a guaranteed death benefit, and cash value growth at a predetermined rate. This policy is designed for those seeking stability and predictability.
Advantages
- Predictability: Fixed premiums and guaranteed death benefits provide financial stability.
- Cash Value: Builds cash value that can be borrowed against or withdrawn.
Disadvantages
- Cost: Higher premiums compared to term insurance.
- Limited Flexibility: Less adaptable to changing financial needs.
Permanent Policy Riders
Riders are additional features that can be added to a life insurance policy to enhance or customize coverage. Common riders include:
- Accelerated Death Benefit Rider: Allows access to a portion of the death benefit if diagnosed with a terminal illness.
- Waiver of Premium Rider: Waives premiums if the policyholder becomes disabled and unable to work.
- Disability Riders: These riders provide additional benefits if the policyholder becomes disabled. They can include options like income replacement and supplemental coverage.
- Riders for Other Insured: These riders allow coverage to be extended to other individuals, such as a spouse or child, under the same policy.
- Guaranteed Insurability Rider: Allows the purchase of additional coverage without undergoing a medical exam.
These riders can provide valuable benefits tailored to individual needs, but they also increase the policy's cost.
Basic Taxation
Individual Insurance:
- Premiums: Not tax deductible
- Cash value accumulations: Tax deferred until gain is withdrawn
- Full surrenders: Any gain is taxable at ordinary income rate
- Withdrawals/partial surrenders: Basis returned first, then any gain is taxable
- Policy loans: Not taxed; interest paid is not deductible
- Dividends: Not taxed; interest earned is taxed
- Death benefits: Lump sum not taxable; other settlement options with interest are taxable
- Accelerated death benefits: Not taxable if qualified event
Business Insurance:
- Premiums: Not tax deductible if policy owned by business
- Executive bonus plan policies: Considered compensation to the employee and deductible to the business
- Death benefits: Tax-free
Conclusion
Navigating the world of life insurance requires a solid understanding of its types, uses, and financial implications. Whether you're looking to protect your family or secure your business, choosing the right policy involves balancing cost, coverage, and additional features like riders. By understanding these fundamentals and staying informed about the latest developments, you can make confident, well-informed decisions that provide lasting security and peace of mind.
Ready to secure your family's future? Compare life insurance policies today and consult a professional to find the best plan for your needs - connect with our team.
This is for informational purposes only. Investment advisory services offered through Cornerstone Wealth Group, LLC dba Cornerstone Wealth, an SEC registered investment adviser.
