Updated: Oct 31, 2019
As millennial professionals who are juggling demanding jobs, high cost of living, student debt, etc., we are always on the hunt for efficient ways to save and accrue wealth. A common yet little known wealth building tool is - drum roll - life insurance!
Life insurance, sounds like a boring topic, doesn’t it? As a matter of fact, it doesn’t have to be. Did you know that life insurance has been used as a wealth building tool for the affluent for decades? Actually, life insurance has numerous surprising benefits that make it more than meets the eye.
1. It can be an investment account or high interest savings account that you can use later in life. Yes, that’s right. Life insurance doesn’t have to be “death” insurance, you can actually invest inside of your policy and reap the benefits when you’re alive. Best yet, the returns on your investment inside of your policy can be accessed income and capital gains tax free.
So how does it work? You pay a basic cost of insurance to cover your life insurance coverage amount (i.e. your “death” benefit). Then any money you pay on top of your basic cost of insurance can be invested in high interest, fixed interest, or public equities that you can retrieve to use for whatever you like after 15 years (typically) with no penalties. In other words, you can overfund your policy and spend your life insurance investment while you are still alive, tax-free.
What can I invest in? There are several fund options, but normally you can choose from fixed interest of 3-5% annual return, high interest of 7-8% average annual return with a floor of 0-1% and a cap of 15% (you won’t lose any principle but you can grow up to 15% per year), or mutual funds that are invested in public equities domestically or internationally. Remember, all your proceeds can be accessed tax-free so that is comparable to 2-3% higher return compared to outside investments that do not have the same tax benefits.
How can I take the money out? In most cases, you are only able to access a certain percentage of your investment amount (that increases every year) until year 15 from starting the account, after which you are able to access 100% of the investment. You still can’t access the death benefit unless you are in a health emergency or it’s passed on after death. More about the health benefits later in this article.
2. You can lower your income tax bracket in the future. Since your life insurance investment is after-tax money that grows and can be accessed tax-free on retrieval, similar to a Roth IRA or Roth 401K, the money you withdraw won’t be counted into your income taxes. That way your income taxes won’t skyrocket when you’re taking your money out. This can be especially beneficial if all your other investments (such as traditional 401K, traditional IRA, mutual funds, real estate income) are counted towards your income. In retirement, you can use your life insurance withdrawals to lower your overall tax rate.
3. You can use your “death” benefit to cover gaps in health insurance. So we’ve been talking about the investment portion of life insurance all this time, but you can actually use your “death benefit”, of which your cost of insurance is going to, to cover healthcare emergencies what can be exorbitantly expensive.
What are examples of gaps in healthcare? These are situations where you get injured or suffer an illness that will cause you to not be able to work or do daily activities and you need a replacement of income to cover living expenses and out of pocket medical bills.
Long term care (LTC)- over 70% of individuals over age 65 will need long term care, and the average cost of in-home long term care is $64,000 per year in California, without inflation. Your life insurance can provide monthly payments out of your “death” benefit if you require LTC.
Critical illness/injury (CI)- a healthy 24 year old male has a 25% chance of getting diagnosed with a critical illness before the age of 65. Critical illness includes cancer, stroke, brain injury, paralysis, and much more. Your life insurance can pay you a lump sum (e.g. $50,000+) at once if you are diagnosed with a critical illness to help pay for costs outside of health insurance coverage.
So what’s the downside to all of this? There are over 700+ life insurance carriers in the U.S. so finding the right policy for your family can be no easy feat. There are multiple factors to consider including age, health, goals, costs and fees, and more. Some life insurance policies can be significantly more expensive than others with the same coverage and benefits and others can be laden with hidden fees. It’s extremely important to find an unbiased and independent advisor that can help you through the process and find the best plan for your family. And once you do, life insurance can not only be a vital protection tool for your family when you need it the most, but also a wealth building tool that you can tap into for your own future.
Amplify is a modern, tech-enabled life and health insurance platform designed for young families to find the right coverage amount and type for their individual needs. We have a variety of temporary and permanent coverage and we help you get approved in days, not months, without requiring a tiresome medical exam or phone interview. In addition, we are fee-only advisors that are incentivized to help you, and not the insurance company. Check out our website for an educational walkthrough to find the right coverage and plan for you or schedule a free 20-min consultation with one of our licensed advisors to learn more.