There are many reasons to want life insurance, as we frequently discuss on Prosperity Thinkers. However, it can be a big decision to make–there are several types of life insurance, as well as various ways to structure a policy. You may still be wondering if YOU want life insurance, and are perhaps wondering what happens if you don’t have life insurance.
What Can Life Insurance Do For You?
Life insurance, like all insurance, is meant to protect against loss. In this case, it protects against an event that is certain to happen: loss of life. While it’s impossible to know when this day will come, having life insurance ensures that the loved ones who remain receive a benefit.
While there’s no amount of money that can replace you, the death benefit does the next best thing. It gives your loved ones time. Time to grieve, time to get affairs in order, and time to rebuild. As one of our team members likes to say, “People buy insurance because they love someone or they love something.”
If you purchase whole life insurance, you can also enjoy living benefits, including access to an increasing portion of your death benefit (equity), called the cash value. This can act as a savings vehicle with certainty, because it’s guaranteed to grow, and is not correlated to the stock market. In fact, thanks to guaranteed interest and non-guaranteed dividends, most people find that eventually their cash value far exceeds what they’ve cumulatively paid in premiums.
This cash value account provides a pool of money that you can use for emergencies and opportunities without actually making a withdrawal, thanks to the policy loan. This allows you to minimize opportunity costs and optimize your dollars.
What Happens if You Don’t Have Life Insurance?
So what does life look like without life insurance? Well, if you haven’t had insurance up to this point, you might have a pretty good idea. However, it can be difficult to assess your current circumstances if you don’t have another reference point. So let’s look at some ways life might differ with or without insurance. (And no, we’re not trying to scare you!)
Storing Money With and Without Insurance
Without whole life insurance, you still have plenty of options for where you store and grow your money. Many people put their money into a savings account at the bank. While this is the most “liquid” option, the interest rate is usually about one percent. So if you’re hoping for growth, this might not be the best option. However, it is liquid, meaning that you can access your money any time you wish. (Sometimes it’s a little too liquid, if you’re working hard to replace a spending habit with a savings habit.)
Despite the liquidity, there’s one major downside: opportunity cost. When you want to use money from your savings, you must withdraw it. This reduces your savings account, which reduces how much money you have earning compounding interest. And not only are you losing the ability for your money to earn interest now, you’re losing what it would have earned over the entirety of your life. You can put money back into your account later, yet those are different dollars with their own opportunity cost.
So every dollar you put back into your savings account is playing catch up to that initial value and what it could have earned you. Granted, the earned interest is low in a bank savings account. However, you also have the opportunity cost of not putting those dollars into a higher-interest asset!
So what are your other options if you don’t have whole life insurance? Well, you can put money into CDs, stocks, bonds, and qualified retirement accounts. However, most of these are lacking at least one of three things: certainty, liquidity, or growth. Whole life insurance provides all three!
Peace of Mind and Life Insurance
Another boon of life insurance—be it term insurance or whole life—is that it provides you with peace of mind. You know that no matter what happens to you tomorrow, your loved ones will be taken care of financially. When you’re young and unattached, this might not be a priority for you. However, this tends to change when your life does. Whether you get married, have kids, become a family member’s legal guardian, or become a caretaker for a family member, major life changes can bring about a newfound sense of responsibility.
Suddenly, you realize that if you were gone tomorrow, there are people who would be impacted in big ways. For example, one of our younger team members got married in the last few years. This joyous occasion put things into perspective—that if either she or her husband were to pass, the remaining spouse would have a heavy financial lift. Student loans, car loans, rent, and other payments that are manageable with two incomes could become unmanageable alone.
Having life insurance in place can ease a lot of those fears and concerns, and allow you to get back to living your life without those worries weighing you down. Preparing for your “death day” helps you not to think about it!
There are many strategies for distributing income from your assets as you wind down your career. However, whole life insurance tends to make HOW you take your income much more flexible. As we share in our Paydown Permission strategy, whole life insurance can allow you to use up other assets for income without worrying about what you’ll pass to the next generation. It can also help you to sequence your income in a way that extends your assets for years and reduces your overall taxes.
The reason all of this is possible through life insurance is the death benefit. By having a guaranteed death benefit, you ensure that no matter what other assets you use while you’re alive, there’s going to be something passed on to your heirs.
Without the death benefit, it’s much harder to spend your assets in good conscience, especially when you can’t predict how much longer you’ll have to take an income.
Taxes and Life Insurance
With life insurance, you can leave a legacy to your heirs that passes to them tax-free. In addition, your cash value is tax-advantaged because you can access it via the policy loan without taxes (since no loans are taxed and you’re not actually using YOUR money, you’re just collateralizing it). This means that you can accumulate money with the certainty that you can use it in a tax-advantaged way.
To be clear, if you withdraw money from your cash value over the base, you can be taxed. You’re also paying premiums with after-tax dollars. However, you won’t pay any taxes on growth within your cash value as long as you leave it there.
If you accumulate your money elsewhere, there’s a good chance you’ll be at a tax disadvantage. For example, interest earned in your savings account can be taxed. The growth on your stock and bonds gets taxed. Even your 401k, which is tax-deferred, will have a tax bill someday. And tax-deferrals are perhaps the most frustrating because you get to enjoy tax credits on the front end, which makes you feel great. Then, when you want to take income, you get hit with the taxes on the backend, reducing the value of what you’ve accumulated significantly.
Taxes are a reality for any asset. However, by paying taxes now, you can reduce your tax bill (and that of your heirs) later. And what do you think… are taxes likely to increase or decrease over time?
What if You Can’t Get Life Insurance?
So after all that, it’s probably clear that there are many advantages to having life insurance. (And ideally, some combination of term insurance and whole life insurance to reach your full Human Life Value.) Yet what happens if you can’t get life insurance?
While whole life insurance is a wonderful asset, its strength comes in part from the underwriting process. In order to make guarantees, insurance companies have to balance their risk, or else they’d go bankrupt paying all the death claims. This means that some people cannot get whole life insurance, such as those with terminal illness.
This, however, doesn’t mean that you can’t own life insurance at all. It’s possible for you to be the owner of a life insurance policy, yet not the one whose life is being insured. For example, you could buy life insurance on your children, grandchildren, parents, siblings, or even employees if you have an insurable interest.
Insurable interest is determined by whether or not you have an existing relationship with that person, and their loss of life would have a negative financial impact on yours. Buying a life insurance policy for a family member would solve many of the above issues if you cannot buy a policy for yourself.
And although you’d be missing out on the ability to provide a death benefit to your heirs, the next best thing you could do is transfer ownership of the policy to your heirs. (This may involve creating a trust.) Instead of a death benefit, they can have access to the cash value. And although the new owner becomes responsible for premiums, there are even some ways built into the insurance contract to suspend or temporarily cover premiums.
Is Life Insurance Right for You?
So what do you think; is life insurance right for you? If you’d like a free consultation, we can create an illustration for you that would show you how a life insurance policy would look like in your personal economy. Just book with us today to get started.