Why life insurance may be worth more than you think

Father and son sitting at the kitchen table and talking over coffee

Did you know that life insurance can do much more than provide your family with a death benefit when you pass away? Here are three more important benefits life insurance can offer:

1. It can cover major expenses during your lifetime

The specific life insurance policy you carry may help cover potentially unexpected costs, including:

Medical — Some life insurance policies provide a living benefits rider (usually for an additional cost), which gives you the option to advance a portion of the death benefit if you’re diagnosed with a terminal illness. You could use it to pay for medical treatment or assistance with everyday activities to care for your basic needs.

Long-term care — Hybrid policies combine life insurance with long-term care benefits that may help you pay for the costs of in-home care, assisted living, a nursing home or other related expenses that Medicare may not cover. Long-term or chronic care riders, available at an additional cost, may also be added to life insurance policies, allowing you to access a portion of your policy’s benefit early for care expenses.

2. It can protect or supplement your retirement assets

Depending on your unique situation, life insurance can potentially help you gain:

Pension flexibility — If you’re married and have a traditional defined-benefit pension plan, you could choose to receive a higher monthly single life benefit payout instead of a joint and survivor option. The difference in monthly income could then be redirected to a life insurance policy (pending insurability) to help provide the surviving spouse with income.

If the spouse dies before the pensioner, the surviving spouse could choose to increase their income by reducing the life insurance amount. There is also the potential to leave life insurance benefits to heirs. Traditional defined-benefit pensions do not provide that option.

Supplemental retirement income — When properly designed for you, a cash value life insurance policy (such as whole life, universal life or variable universal life) can generate cash value as a stable source of supplemental retirement income, if needed.

Tax efficiency — With effective planning, life insurance proceeds can be structured to help pay estate taxes or settle outstanding loans. Some insurance solutions can also provide you with tax advantages, such as the ability for your life insurance policy to grow tax-deferred. You can discuss the potential advantages with your advisor and a tax professional.

3. It can generate and transfer wealth

You can use life insurance to help enable:

Potential portfolio returns: Universal, indexed universal life and variable universal life policies can help support your long-term investment strategy. They combine life insurance coverage with the ability to earn potential investment returns. Some indexed universal life policies also offer downside protection — a way to help reduce the frequency or amount of losses among your index accounts.

Wealth transfer: Life insurance can protect and sometimes even increase the amount you’re able to pass to a beneficiary. For example, if you don’t need the income from annual required minimum distributions (RMDs) when you reach your RMD age – which is 73 for those who turn 72 after 20221 – you could consider using the RMDs to fund a life insurance policy, assuming you qualify. Death benefit proceeds could also create more wealth for your heirs because, generally speaking, life insurance proceeds are tax-free to the beneficiary — whereas traditional IRA withdrawals count as taxable income.

Discuss these key questions with your advisor

Your 50s and 60s are good times to revisit life insurance — and solutions may be more accessible and less costly than you think. Together with your advisor, you can consider important questions, such as:

  • Are you earning income in retirement from consulting or part-time work?
  • Are you carrying debt, such as a mortgage or student loan?
  • Does anyone (a child or spouse) depend on you for financial support?
  • Will estate taxes be a concern for you and your heirs?

Based on these questions and more, your advisor can help evaluate life insurance options that support your goals and address key factors such as your estate, beneficiary and tax situation.