How Insurance Can Fit in a Portfolio
In life there are significant milestones remembered with great sentiment. Driving away in that first car, buying a first home, getting married, the birth of a child and purchasing that first permanent life insurance policy.
OK, that's a stretch, but these milestones bring with them an increasing amount of responsibility especially from a financial perspective. Hopefully by the time we begin to work with a financial professional, we come to realize that life insurance can play a key role in the success of any financial strategy.
[See: 5 Reasons a Market Crash Is the Perfect Time to Buy.]
Even the most solid investment and financial strategy can fall apart in the event of the untimely demise of a loved one. For that reason, most people look into getting a term life insurance policy when they get married and start a family.
At the same time, permanent life insurance is often misunderstood as only being more expensive and is ignored or not given credit for the role it can play and potential benefits it can provide to a holistic financial strategy.
Most people understand that permanent life insurance policies provide a death benefit to family and loved ones in the event the policyholder dies. However, a recent study by Allianz Life found that many people don't understand the full benefits that these policies can offer.
In fact, the Life Insurance Needs Study found that women in particular are lacking in their knowledge of the full range of benefits permanent life insurance can offer.
Certain types of permanent life insurance policies have additional features that can play a complementary role in a family's financial strategy, including the opportunity to build tax-deferred accumulation value and access any available cash value through income-tax-free loans and withdrawals.
Despite the important roles women play when it comes to family finances, only a little over a third (34%) of women believe that the cash value from a permanent life insurance policy can be used to help fund education, retirement or other financial needs. This is compared with 51% of men who know about these potential benefits.
Many of these benefits can come in the form of an income-tax-free loan or withdrawal which is borrowed against the cash value of the policy, which has the opportunity to grow tax deferred over the life of the policy. A portion of that money might be accessed to help fund college expenses for children, or to cover medical expenses by taking out a loan against the cash value balance and using the money income tax free, which must be paid back with interest.
[See: 6 Things to Consider Before Investing in IPOs.]
It's important to know that a loan cannot exceed the total cash value of the policy. If this happens, the policyholder will need to add in more money to the policy or it could lapse, and they'll end up paying taxes on the difference. Additionally, if a loan isn't repaid, the death benefit is reduced when the policyholder dies.
Working with a financial professional will help with managing policy values to help prevent a policy lapse and adverse tax consequences.
In addition, only one-third of women believe that cash value from a permanent life insurance policy can be used to supplement retirement income while you are still alive versus more than half (52%) of men. This supplemental income would come from a policy loan or withdrawal as well.
Also, the study found about one-quarter (27%) of women know that death benefits paid from life insurance to beneficiaries are generally not income taxable versus 38% of men.
What's especially interesting about these findings is that although people seem to lack awareness of the potential benefits of permanent life insurance, the majority of people say they want a financial product that can offer the same benefit offered by permanent life insurance.
Despite all of this, fewer people who work with a financial professional are discussing the potential benefits of permanent life insurance with their professional than they did in 2018.
Utilizing a permanent life insurance policy within an overall retirement portfolio requires careful planning and strategy. For investors who are interested in leveraging some of the potential living and tax benefits that a permanent life insurance policy can offer, the best place to start is to talk with a financial professional.
[See: Do Bull Markets Scare You?]
Disclosures: Allianz Life Insurance Co. of North America conducted an online survey, the 2019 Life Insurance Needs Study, in March 2019 with 800 respondents age 35 to 60, having an annual household income of $100,000-plus. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Withdrawals in excess of premiums paid will be subject to ordinary income tax. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. If a policy is a modified endowment contract (MEC), policy loans and withdrawals will be taxable as ordinary income to the extent there are earnings in the policy. If any of these features are exercised prior to age 59½ on a MEC, a 10% federal additional tax may be imposed. Tax laws are subject to change and you should consult a tax professional. FIUL is not a source of guaranteed income in retirement.
More From US News & World Report