Life insurance can play a role in helping secure your loved ones’ present and future financial security. But do you need to own life insurance if you have substantial financial resources of your own? That depends — and these answers to frequently asked questions can help you decide.
1. Isn’t life insurance just for funerals?
Life insurance is designed to cover funeral expenses and related end-of-life costs. But it has a broader scope, providing needed funds for your family or business when you pass away.
For instance, a life insurance payout can help survivors pay off your debts, replace part of your income to support your family’s lifestyle and provide funding for future goals, like paying a child’s education expenses. In some cases, a policy may serve as an alternative savings vehicle, provide cash flow or help you pay for your own health care needs. By using life insurance for these needs, you can preserve any legacy you hope to leave.
2. Aren’t life insurance policies temporary?
Term life insurance is a temporary contract meant to cover a temporary need. For instance, you may choose a policy term that lasts until your youngest child is settled on their own or until your mortgage is paid off. Alternatively, permanent life insurance is a contract that lasts for your lifetime.
3. How can life insurance provide cash while I’m alive?
Many permanent life insurance policies build cash value that you can access at any time for any reason. Some policies have guaranteed earnings, while others have earnings based on a selected index. In either case, your cash value won’t suffer losses because of a market downturn. If you need cash in a down year, instead of potentially selling assets at a loss, you could draw from your insurance cash value.
Be aware that, while you don’t have to pay back what you use, removing funds could affect the value of your policy.
4. How can life insurance help pay for my health care?
If you add an acceleration rider to your policy, you can receive benefits before you pass away if you’re diagnosed with a terminal illness, or if you require chronic or long-term care. You must qualify for this rider and there is a nominal fee to add it to your policy.
5. Is life insurance part of my estate?
Yes. Owning a life insurance policy is like owning any other asset, and the policy could be included in your gross estate. Death benefits are not normally subject to income tax and are never subject to capital gains tax, but they could be subject to state and federal estate tax. To avoid inclusion of a life insurance policy's death benefit in an estate, the life insurance policy should be owned and the premium paid for by an irrevocable life insurance trust. (Talk with an estate planning attorney and tax advisor for more information about your particular situation.)
6. How does life insurance work as a savings vehicle?
With cash value policies, additional contributions can be made within IRS limits that bolster the overall value of the contract and provide a liquid source of capital. Also, there are no income-based contribution limits or age-based restrictions on accessing these funds. Plus, if you pass away before making all your premium payments, the insurer will still fulfill the entire payout amount for your beneficiaries.
7. How can life insurance protect my business?
Depending on the specifics of the policy, life insurance may offer various benefits, such as:
- Allowing beneficiaries to pay off outstanding liabilities for the company
- Funding a buy-sell agreement, so a business partner can buy out your heir’s ownership
- Providing needed short-term liquidity by tapping into the policy’s cash value
8. How much life insurance is enough?
There is no single answer to this question. As a baseline, make sure you have enough coverage for estimated funeral expenses and paying off debt. Then consider other potential uses you may have for the policy — such as replacing income, buying out a business partner or managing healthcare costs — and expand coverage to meet those needs.
9. How much does life insurance cost?
The cost of a life insurance policy can vary tremendously based on such factors as the face amount and the type of policy. Other impacts to pricing include age, gender, health history and lifestyle habits (such as tobacco use). If you have risky hobbies or have a history of health issues in your family, those can also impact cost.
How we can help
A life insurance policy can be an important pillar in your financial plan, helping to mitigate risk and providing a useful asset for a variety of needs. To determine how it can most effectively fit into your overall strategy, it’s important to have a conversation with a financial professional, such as your advisors at Hancock Whitney.
The information, views, opinions, and positions expressed by the author(s), presenter(s), and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented.
This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation.
Investment products and services, such as brokerage, advisory accounts, annuities, and insurance are offered through Hancock Whitney Investment Services, Inc., a registered broker/dealer, member FINRA/SIPC and an SEC-Registered Investment Advisor.
Hancock Whitney Bank offers other investment products, which may include asset management accounts, as part of its Wealth Management Services. Hancock Whitney Bank and Hancock Whitney Investment Services Inc. are both wholly owned subsidiaries of Hancock Whitney Corporation.
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