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Other Benefits of Life Insurance

In addition to ensuring that your beneficiaries will receive an economic payment (i.e., earnings replacement) if you should die, life insurance can aid you in other important areas of your financial life. Life insurance offers four additional benefits that may be of interest to you as you develop your personal financial plan; life insurance can benefit you in estate planning, insurability, retirement planning, and saving. However, life insurance products are most beneficial because of what they were originally designed for: insuring your beneficiaries against the economic loss caused by death. While the payments can never replace the person lost, they can replace their ability to pay for living expenses, home mortgages and taxes, education expenses, or mission costs, or at a critical time they make it possible for a surviving spouse to remain in the home and concentrate on raising the surviving children. The following paragraphs explore some other uses of life insurance.

Life insurance proceeds may be used in estate planning to ensure that sufficient funds are available to pay estate settlement costs after death (debts, taxes, legal, burial, etc.). Life insurance proceeds may also guarantee that heirs receive as large a share of inheritance assets as legally possible. In addition, proceeds can be used to ensure that inheritance assets, such as businesses, do not have to be sold at discounted prices to raise funds for estate taxes or other liabilities.

Permanent life insurance products have a guaranteed insurability option. Once you have a contract with the insurance company, it cannot be cancelled by the insurance company unless you fail to make payments. Once you have this contract, regardless of your medical condition, you cannot be denied the life insurance agreed upon, even if you contract a major disease.

Life insurance may also be used for retirement planning. When retirement income is taken from the cash value of an insurance policy, it can be received on a tax-favored basis. The cash-value portion of life insurance, after mortality costs and fees, may gain interest or capital gains that are exempt from taxes. This extra interest or capital gains may be saved for retirement. Life insurance also allows you to borrow against the cash-value portion of your policy and, in essence, receive a low-cost loan. Moreover, when you borrow against the cash-value portion of your policy, you don’t have to sell the permanent assets as you would with a normal investment account (resulting in capital gains or losses). Instead, the insurance company actually makes a loan to you against the cash-value portion of the policy.

Finally, life insurance can be a type of forced savings account. For those without the discipline to make monthly payments into a savings or investment program, life insurance can be a part of an overall investment plan. The investor purchases certain types of permanent life insurance products with low fees and expenses and can direct, to a degree, where the assets are invested.

As with all financial assets, there are no simple rules or generalities about life insurance that apply in all situations; however, having life insurance is, for most, a good idea. Life insurance contracts areunique in that they are financial instruments with specific tax advantages, and they are instruments that may be useful in many different situations. Additionally, depending on the types of insurance clauses (or riders) you have, contracts can be customized to meet your specific personal and family goals. The key to deciding which insurance will help you best achieve your personal and family goals is to understand yourself, your goals and objectives, and your financial situation and budget. In addition, you should also understand the costs and benefits of competing financial instruments.


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