Illness, injury, and premature death are the most significant threats to achieving our financial goals. These events can result in an inability to generate income, leading to decreased wealth over time. The good news is that specialized insurance can protect us from these risks and prevent them from affecting our financial plans. While Term insurance can provide temporary protection, Permanent Life insurance offers life insurance benefits and tax-free wealth-building benefits. Whole Life insurance, in particular, is an excellent option for long-term wealth management. Another type of Permanent Life insurance is Universal Life insurance. Using insurance to protect against risk and build up our net worth, we can make the most of our money and achieve our financial goals.
Hedging risk with specialized insurance
Illness or injury can result in an inability to work and generate an income. Unfortunately, a lack of income doesn’t mean our expenses will also stop. To maintain our standard of living, we’ll eventually start to use our savings to pay for expenses. Once our savings are gone, we resort to lines of credit and credit cards to cover costs. If this happens, you move down instead of up the wealth ladder.
The good news is that specialized insurance is available to protect us against these risks. We can hedge our risk and guarantee that if any or all of the above should happen to us, it won’t affect our financial plan. Any time we enter into financial planning, risk hedging, or investments, we want to be able to use the same dollar to hit as many goals as possible. Doing so allows us to “re-use” the same dollar multiple times, turning our one dollar into two or three. In this way, we use insurance not only to protect us from risk but also, to build up our net worth.
To protect against premature death, you should consider life insurance. The two main types of life insurance are Term insurance and Permanent Life insurance.
Term insurance covers you for a specific term, which expires once that term is over. The insurance company will pay a tax-free death benefit if you die within the insurance term. This type of insurance is the cheapest, as it is temporary. This means it is quite helpful when you don’t have a lot of cash flow and have a temporary risk to manage.
Most people with low cash flow who want to protect themselves and their families look at term insurance. The usual terms are five, 10, 15, 20, 30, 65, or 100 years. This type of insurance won’t do much for you unless you pass away; it won’t build up your wealth. You can compare this type of insurance to renting an apartment. While paying rent, you don’t own your home, and the minute you stop paying your monthly rent, you have no home. If you continue to rent, the monthly rent will increase every few years.
Permanent Life insurance
There are two types of Permanent Life insurance. The first is Participating Whole Life insurance, and the second is Universal Life insurance.
Participating Whole Life insurance
When we do financial planning, we want to focus on what happens if we die and, most importantly, what happens if we live. If we live, we want to be wealthy. Luckily for us, Permanent Life insurance, known as Whole Life, is one of the best ways to do so. Whole Life is one of the financial industry’s most well-kept secrets in building wealth in a tax-efficient manner. I use it, my clients use it, and long term, very few things can compare if you use it correctly. Whole Life provides a death benefit and an investment portion known as your cash surrender value (CSV). When you die, the entire policy pays out tax-free. If you live, for most of these policies, you can contribute and pay the premium from eight to 20 years, after which you don’t need to pay the premium anymore, and the policy carries itself. This is known as a paid-up policy. Your CSV grows tax-deferred; if you position it correctly, you can access the money tax-free. The key to wealth management is how much tax you pay when you no longer work.
Universal Life insurance
When you pay into the policy, your monthly premium is split into two parts: the life insurance and the other additional (optional) part that funds the CSV. The additional monies grow tax-free within the policy in the CSV. Within the CSV account, you can invest the funds in various offerings from the insurance company, such as GICs, bonds, mutual funds, etc. These monies can offset and pay down future premiums or build your investment account, which you can access anytime.
You can access the funds in two ways: a straight withdrawal, which has tax implications, or the more tax-efficient way, by leveraging the money. This means you are borrowing against the value of the CSV. For Universal Life insurance, your loan-to-value (LTV) will range from 40%-70% of the CSV value. This is because funds in the CSV of a Universal Life policy, on average, are significantly riskier because they are market dependent. Since it is a secured loan in the form of a line of credit (LOC), the interest rate should be lower than the average rate of return on your investments in the CSV. Since the money you will be using is on a LOC, you have access to cash today tax-free while the funds continue to grow in your CSV.
Should an unfortunate event occur, such as death, disability, or critical illness, would you be financially secure? Don’t wait until it’s too late; consider protecting your financial future today. Please feel free to contact me to learn more.
Tristen Qaderi CFP, CLU, CHS
Wealth and Insurance,