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When it comes to life insurance, many folks don't think they need it, if they consider it at all. In fact, it's a versatile financial tool that can help to build financial wellness now and for the future.

No matter your personal circumstances, chances are you haven’t yet put life insurance to work for you. According to LIMRA, a financial services research and consulting organization, only 59% of Americans have life insurance, and about half of those are underinsured.

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Provide money to help the people you love

In its most basic form, when you die, life insurance provides a sum of money to people you care for. You may want to use the death benefit for final expenses or to pay off a mortgage. Even in your 20s, you might want to think about life insurance if you’ve co-signed a student loan with your parents or others, so that your debt doesn’t become their financial burden. Or you may want to make sure there’s enough money for your children’s education or parents’ long-term care, for example.

 

For these kinds of goals, many people turn to term life insurance, which provides protection for a specific amount of time, typically from 10 to 30 years. So, if something happens to you during that time, your beneficiaries will receive a payment from the policy.

 

Create another source of retirement income

If you’re looking for a way to supplement your retirement income, a permanent life insurance policy — like whole life or universal life — might do the trick. Essentially, permanent life insurance allows you to use the policy to accumulate cash value, which is especially useful if you’ve maxed out your 401(k) or have too much income to contribute to a Roth IRA or make a deductible contribution to a traditional IRA. You can use that cash value any way you want — for yourself, to pay for a child or grandchild’s wedding or to cover an unexpected expense.

You can also take tax-free loans from the cash value of your permanent policy, giving you access to cash for any use or emergency you may have. You do have to pay interest, which can range from 5% to 9%, according to current information from Bankrate.com. Still, most loans have lower rates than a bank or credit card loan and they don’t impact your credit score. And while you don’t have to pay it back because the loan could be deducted from your death benefit, you do need to be sure the interest gets paid. Otherwise, your policy could lapse if the loan plus interest exceeds your policy’s cash value over time. It’s also important to understand that unpaid loans and withdrawals will reduce policy cash values and death benefits and may have tax consequences. If your policy does lapse with an outstanding loan, the gain in the policy becomes immediately taxable.

There is also a limit to how much you can put into a life insurance policy to take advantage of this strategy. Over certain funding limits, the policy becomes classified as a Modified Endowment Contract (MEC), which has fewer tax perks. This means your first withdrawal from the policy — even if it’s a loan — is considered taxable income. On MECs, there’s also a 10% tax penalty if you take a distribution prior to age 59½.

 

Have access to money in case you get sick

With longer life expectancies, people rightly worry about the costs of chronic care. According to a study published in The American Journal of Medicine in 2018, more than 42% of 9.5 million diagnosed with cancer from 2000 to 2012 drained their life’s assets in two years. In the case of a disease like cancer or other qualifying illness, some permanent life insurance policies offer options called riders that, for an additional cost, allow you to use a portion of your death benefit while you’re still living to pay the costs associated with a terminal or chronic illness.

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Michael G. Romanello, CEP, CLTC

Michael G. Romanello is a registered representative of and offers Securities through Independence Capital Company Inc.  Member FINRA/SIPC. 

5579 Pearl Road, Suit 100 Cleveland, OH 44129

Investment Advisory Services offered through Independence Capital Company Inc. 

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