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Here are answers to some of your questions
At ML Insurance Services, we know how busy you are living your life, growing your career, taking care of your family. To help you plan a strong, effective financial strategy for you and your loved ones, we’ve assembled below the most common questions regarding purchasing a life insurance policy for yourself or for a family member. With the answers below, we hope that you can better understand the power and security of an investment in permanent life insurance, for life and beyond. Let us know if you have even more inquiries by sending us a quick note, and we’ll be happy to respond to you within the next business day.
Most people have their retirement savings in IRAs and 401(k)s. These are bad assets because they are tax-deferred. The tax will one day have to be paid, creating a growing debt on these retirement savings. The future tax will be paid when the money is needed most, in retirement, and at an unknown, but probably higher tax rate.
This makes these traditional retirement accounts an uncertain and diminishing asset over time. Replacing these accounts over time with permanent life insurance turns these tax-deferred funds into tax-free savings. Clients should begin a program of systematic IRA withdrawals to decrease their IRA balances and plow those funds into permanent life insurance.
This tax will have to be paid anyway beginning at age 70 ½ and probably at a higher rate on a higher balance. So it’s best to deal with this now to have more retirement funds available long- term. The increasing and uncertain tax debt is paid off by paying the tax now at known tax rates, which are at historic lows right now, while income tax-free savings are growing in the permanent insurance policy.
No. That is a common fallacy. Moving funds either from IRAs or from other accounts to permanent life insurance is not an expense; it’s an investment in a better long-term asset. Yes, if the funds are withdrawn from an IRA, there will be a tax to pay, but that tax will have had to be paid at some point anyway, probably at higher tax rates in the future.
Once the funds are in a permanent life insurance policy, they are simply located in a different and far better long-term asset than an IRA or 401(k). The funds in that new location, the life insurance policy, remove not only the tax risk, but can also eliminate the stock market risk, depending on how the policy is set up. That’s a big deal in retirement, and something you generally cannot do in a traditional IRA. If you were changing investments, you would not think of that as an expense, so the same applies here.
People think of life insurance for the death benefit, but most people don’t know about the powerful lifetime retirement and tax benefits. Funds in a permanent life insurance policy can double as a retirement savings account, but without the worry about what future tax rates will be.
If these funds are needed in retirement they are accessible, tax- and penalty-free. That is a big deal, because if the funds were in an IRA, distributions would not only be taxable (in a traditional IRA), but that increased income could trigger other so called “stealth taxes.”
These are hidden tax increases in the form of phased-out deductions, tax credits, exemptions and other benefits as income increases. For example, an income increase from an IRA distribution could cause more Social Security benefits to be taxable or the trigger the 3.8 percent additional tax on net investment income from capital gains, interest and dividends.
Accessing funds from a life insurance policy are tax-free (up to cost-basis; and thereafter if taken as policy loans against the tax-free death benefit) so they don’t increase income. And in fact, the withdrawals keep taxable income and taxes lower in retirement. These are valuable lifetime benefits, in addition to the death benefit.
IRAs are subject to annual required minimum distributions (RMDs) after age 70 ½, whether the money is needed or not (Roth IRAs are exempt from lifetime RMDs). This causes forced distributions and additional taxes, though the client may not need or want to withdraw those funds.
These forced withdrawals take control away, while withdrawing from the value in a life insurance policy can be done at any time, or not. Clients are in control of their retirement savings in a life insurance policy.
Life insurance creates more long-term wealth than any other investment. And because this wealth is income tax-free, it is much more valuable than tax-deferred retirement savings that are at the mercy of future higher tax rates.
It’s the leverage that creates the wealth. Life insurance is the only investment where one dollar can do the work of many and the result is guaranteed and tax-free. With an IRA for example, it would take many years to multiply that balance; and when it is withdrawn, it will be diminished by taxes.
Taking the same funds that were in an IRA and investing them (after-the tax was paid on the IRA distribution) in a permanent life insurance policy, would produce many multiples of that original IRA balance, and it would be tax-free, not only for use during life but especially if there were an early death.
It depends, first ask yourself - “is anyone financially dependent on me?” You may not have a spouse who is dependent on you but what about other family members? Even if no one is dependent on you, you may want to consider purchasing life insurance to cover the repayment of debts, taxes, funeral and other final expenses.
But before you make a final decision, think to the future. If you get married and have children someday, you may want to have life insurance coverage. If you buy coverage today while you're young and healthy, you'll get much better premium rates than if you wait. Rates increase as you age and if your health deteriorates.
The idea of buying life insurance for your child is something no one wants to consider because it forces us to consider the unthinkable. But purchasing a policy for a child isn't just about having financial protection if the unthinkable happens; it's about ensuring the child's financial future.
Purchasing a policy also locks in the child's insurability. Usually, children don't have to go through a medical underwriting process - the parents simply answer a few medical questions. As long as the policy remains in force, the child will always have life insurance. Most insurance policies today also offer optional riders that will allow the child to increase their insurance coverage when they reach certain milestones in life.
Yes you can. You may have access to policy cash value through either a withdrawal or as a loan from the insurance company using the policy as collateral. If you take a withdrawal, your policy values will immediately be reduced by the withdrawal amount. If you take a loan, depending upon the type of insurance you have, your policy values may continue to grow. You are not required to repay the loan, or the loan interest, during your lifetime. However, if you choose not to, any outstanding loan balance will reduce the amount of death benefit payable to your beneficiary.
If your insurance protection is Term life, you will have a grace period to make your payment. If by the end of the grace period you have not made a payment, your policy will lapse and you will no longer have coverage.
If your insurance protection is permanent life insurance, you will have a grace period to pay your premium plus some additional options. It may be possible that your policy has sufficient cash value to pay the premium from those policy values. Just be aware that using policy values and benefits to pay the premium due will reduce the policy's cash value and death benefit, and may increase the risk of lapsing the policy. If you don't have sufficient cash value to pay the policy premiums, you may have the options to reduce your face amount to a level that doesn’t require a premium payment.
Most important, if you are having trouble making your payment, contact us. We will be able to give you specific options for your policy.
No. The actual payment you receive will be less than the portion of the death benefit accelerated because the benefits are paid prior to death. Values are based on current interest rates, the age of the policy, and your age and health.