The majority of people who buy life insurance usually do so to provide income replacement for their families.
…but, did you know that there are many creative ways to use your life insurance policy?
Term life, is a much more basic form of life insurance which pays death benefits only. It’s great for income replacement and providing a financial safety net for your family, but does not provide as much room for creative uses as permanent policies.
Permanent life insurance policies on the other hand have much greater flexibility in terms of creative planning for both personal and business purposes.
Permanent policies not only provide a person with death benefits but have the added advantage of having a cash value accumulation portion which grows over the life of the policy.
The best part? There are a variety of ways you can use these components to your advantage while you are still living and thereafter.
In this article, for the most part, we are talking about permanent policies such as Universal Life, Indexed Universal Life, Guaranteed Universal Life and Whole life policies. Although, there is one particular way Term insurance can be used in a creative manner for both personal and business use, which we will explore below.
Quick Guide To 20 Creative Ways to Use Life Insurance
- Personal or Small Business Loans
- Access to Immediate Cash Flow
- Use for Management of Chronic Illness
- Tax Shelter
- Reduction of Estate Taxes
- Increase in Death Benefits
- Payment of Premiums
- Surrender of Permanent Policy
- Supplement Retirement
- Enhance Income
- Irrevocable Life Insurance Trust (ILIT)
- Fund College Tuition or Pay Off Debts
- Payment of Long Term Care
- Start a Business
- Investment Alternative
- Funding Your Favorite Charity
How to Use Life Insurance Creatively for Business Use
- Key Man Protection
- Deferred Compensation Plan to Retain Employees
- Cross Buy Sell Agreement
- Set Up a Group Life Insurance Plan
How To Creatively Use Life Insurance for Personal Use
Many people need to obtain personal or small business loans (SBA’s). Banks require you to have life insurance as collateral. Most insurers offer term policies starting at a 10 year term, which may too long of a period to insure a loan.
There are a few insurers which offer 1 Year renewable policies or 5 year term policies. To find insurers that fit your needs, we recommend using an independent life insurance agent, such as the ones here at Huntley Wealth.
It generally takes 12 – 15 years before you can take advantage of the the cash value accumulation portion, but you can borrow against it. You can choose to pay the loan back to the insurer with interest, or have the amount deducted from the death benefits (also with accumulated interest).
There are potential tax disadvantages involved so you should speak with a financial adviser if you do so.
Some, but not all permanent policies will allow you to access funds from your death benefits if you develop a chronic illness. A portion of the death benefits may be used to pay for medical expenses while you are still alive. The extent of your chronic illness must incapacitate you sufficiently as defined in the terms outlined by the policy which may vary from insurer to insurer.
The cash value accumulation for many policies also allows you to use your policy as an investment vehicle. The money distributed into that portion of a permanent policy is invested by the insurer. Many companies provide a minimum amount of return regardless of how the market performs. The return you make within a life insurance policy is not subject to taxes.
A permanent life insurance policy can be used to: 1) Reduce estate taxes: The amount of premiums are deducted from your estate to reduce annual taxes, and 2) Cover estate taxes: Immediate tax free cash becomes available when you die so your beneficiaries can pay for both federal and state estate taxes without having to liquidate assets.
Did you know that if you have no need for the accumulated cash value portion, you can use these funds to increase your death benefit? It depends on your insurer, but most companies want to keep your business. All you have to do is contact them and tell them you want to trade the cash value accumulation for increased death benefits equivalent to the cash value that you have already accumulated.
Permanent policies are much more expensive than term policies. Once you have built up the cash value accumulation, many policies/companies will allow you to use this built up cash accumulation to pay your premiums, which gives you more immediate cash flow.
If you no longer need life insurance and are sufficiently well, or if your financial situation changes where you can no longer pay the premiums, you can always surrender the policy rather than let it lapse. This assumes you have had the policy long enough to benefit from the cash value accumulation feature.
Many high income earners will likely max out what they contribute to their IRA’s and 401(k) plans. If you need additional means to find a tax shelter for your retirement income, then a permanent policy may be the ideal choice. Any additional income you derive in the cash value accumulation portion is non-taxable.
There are also other forms of policies known as annuities. You buy a policy when you are younger and the premium you pay is invested. When you retire you can opt for either a fixed income or opt for a variable annuity which varies the payment based on how well the annuity performs.
You can also use your permanent policy to set up an Irrevocable Life Insurance Trust (ILIT). Once established this trust that cannot be changed. A trust can be used to protect your beneficiaries from estate taxes as the trust is not considered to be part of the estate. It also protects the recipients of the trust from creditors. ILITs have pros and cons, so always be to to discuss the establishment of a trust with an estate lawyer or experienced financial adviser.
Again, this refers to using the cash value accumulation portion for both of these purposes. As stated previously, if you withdraw the cash to fund your children’s education or to pay off a debt, you may be subject to tax ramifications and a reduction of the death benefit portion of the policy.
If you are elderly and are looking to qualify for Medicaid, you may not be able to if you have a life insurance policy in excess of $2,000.00. Rather than letting any policy above this amount lapse, or surrender the policy, you may want to consider converting the life insurance into a Long-Term Care benefit plan.
Converting a policy will transfer the ownership of a life insurance policy to an entity that acts as a benefits administrator. As the original owner, you no longer hold the policy so it won’t count against you when applying for Medicaid. The benefits administrator will pay the monthly premiums on the policy to the insurance company, and agree to pay the previous policy holder a series of monthly payments based on the value of the policy.
It can be very difficult to find startup capital to fund a new business. Lenders are very reticent about approving loans if you don’t have revenue. If you have built up the cash value feature in a permanent life insurance policy, you can always borrow that money to help fund the costs of launching a new business.
If you are risk adverse when it comes to investing money, and are seeking a risk free investment vehicle which is not taxable, then a the cash accumulation feature of a permanent policy can be the ideal choice. Many policies offer a minimum rate of return which protects you even when the market is experiencing a downturn. The payout you receive is also tax free.
Rather than simply donating your wages or savings to your favorite charity, you can significantly boost the amount you are able donate by designating your beloved charity as beneficiary of your life insurance policy. This money will be donated tax free to the charity you choose when you pass.
How To Creatively Use Life Insurance for Business Use
Life insurance can also be used to enhance and protect your business in a variety of useful and creative ways including:
Every company whether small, medium or large is dependent on the resources and abilities provided by persons who are vital to the success of the enterprise. Losing key personnel can put excess financial strain on a company. You can protect your business by buying a life insurance policy on key people.
Use Group Cash Value Life Insurance plans to provide incentives for employees to remain with the company. Plans such as Nonqualified Deferred Compensation Plans allow the employee to build up cash accumulation which is tax deferred and can be borrowed against. The employee also has the additional benefit of being able to name their beneficiaries, the amount they want to contribute and value of the coverage.
This type of policy can be used to protect the owners/partners in a business along with their heirs. Each owner/partner buys a policy on the other partner(s) equivalent to the value of the share they have vested in the business. The policy is structured so the heirs can sell their share of the business to the surviving partners. There are taxation issues involved so be sure to use an appropriate business adviser/lawyer when setting up these types of plans.
Group life insurance can be a big incentive for any potential employee to join your organization and a perk for existing employees. It’s generally very inexpensive to buy and can be a boon to employees who may not already be in the best of health and have difficulty finding affordable life insurance for their families. A plan can be created where employees have the option to buy additional life insurance on top of the existing Group Plan.
Need more information on how you could creatively use a life insurance policy? Call us today at 877 – 443 – 9467. We can help!
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