What do you think about when someone mentions life insurance? For most of us, we initially think about how we pay money so someone else can benefit once we pass on. However, today's life insurance holds much more value than it once did and you may want to take another look at the "living" benefit portion of it before you just disregard it as an additional expense. Here are four reasons you may want to stop thinking of it as an expense and start thinking of it as an asset class.
Reason #1 - Disability Income
Most of us only think about disability income when its open enrollment time at work. Because otherwise disability benefits can be quite costly as a standalone policy. You may not be aware but many life insurance products have features that cover you if you become disabled and even provide an income stream that could help you pay the bills while you are out of work. Plus if you change jobs this coverage goes with you.
In some cases the benefits on a life policy can meet or exceed those of your work based plan plus if you change jobs you won't have to worry about whether or not your next employer offers this type of ancillary benefit. This can be especially vital in today's money strapped workplaces where most employers are cutting back on the ancillary benefits to help reduce overhead and save money on rising healthcare costs.
Reason #2 - Living Benefits
What the heck are living benefits? You may not have heard this term before but this is not exactly a new feature on life insurance policies. In fact, they have been around for a very long time they just haven't been as comprehensive as they are today. So what are living benefits? It is critical illness, chronic illness, and terminal illness coverage. Let's break these down a little further. Let's start with the one that seems most obvious.
This benefit is probably the most self explanatory of the three. If you are diagnosed with a terminal illness or disease and the doctors state you have 12-24 months left to live then the insurance company will accelerate the death benefit on your life insurance policy. You might want to consider it but I am sure it would be nice to cross off the bucket list before you go and this could provide the funds to do it while still taking care of the family. Why continue to work if you know the time is coming. All joking aside being diagnosed with a terminal illness is a bad enough situation without being stressed financially on top of it all.
With chronic illness if you can't perform 2 of your 6 activities of daily living such as taking a bath or dressing yourself then you would qualify as chronically ill. In this case the insurance company would accelerate the death benefit to you. Depending on the company and product they may pay it in either an income stream or as a lump sum that you can use however you want. Unlike long term care insurance you don't have to use it for a nursing home. You get to use it on whatever you like. Again, different policies have different stipulations but there are those out there with no requirements on how you use the funds.
This could certainly off set some costs or get you into a nice facility. Especially since the average say at a nursing home is 3-5 years and you have to spend down all of your own savings before you can qualify for most state benefits. Not to mention most of us won't buy long term care insurance because we worry we won't need it and what if we pay all those premiums and never use it that's money down the drain. The fact is the majority of of will need long term care during our lives but we won't have any coverage in place. With living benefits in place that blow could hurt a little less or maybe even not a all.
Critical illness covers you if you have a heart attack, stroke, or get diagnosed with cancer. You may be wondering why you would need this type of coverage if you already have health insurance but believe it or not most of the bankruptcy's in the united states are a result of major medical illnesses and in over 80 percent of those cases the folks who filed had health insurance in place.
The problem is most health insurance plans don't provide enough coverage or exclude certain treatments for illnesses like cancer. It doesn't stop there though... because when most of us get sick we have to take time off work which means lost income and if we lose income we can't pay the bills. What about savings? We all know we are supposed to have an emergency fund right? The sad fact is most Americans are only 2-3 paychecks from having to file bankruptcy!
Well my spouse will still be working. Illnesses take a toll on spouses too who have to miss time off work to take sick patients back and forth to the doctor for chemo-therapy treatments and other procedures. It's just a overall money trap for most Americans. The average heart attack in the USA costs $1 million according to an article from the National Business Group on Health.
So clearly living benefits are a powerful reason for rethinking life insurance as an asset instead of an expense. They could save the average family from financial disaster or they could save the wealthy person from having to drain the savings. Now let's take a look how it could also make you wealthy.
Reason #3 - Retirement Savings and Retirement Income
Did you know that you can gain interest inside a life policy? That's right! You can actually gain quite a large sum and it could be accumulating tax-free. I won't bore you with a bunch of tax code language here so I will para-phase a bit and if you want the full details you can check out the IRS tax code 7702 which outlines how the money inside a life insurance policy can be taken as a tax-free income.
So imagine this with me for a moment, we put money into a life insurance policy each month an we get protection from things like disability, critical and chronic illnesses but at the same time we are earning interest on that money. So how good can the interest really be? Well that depends on what type of policy you buy. But let's use an fixed interest whole life policy for example. At the time of this article you can get 4% guaranteed interest rate on a fixed rate whole life policy when most banks and credit unions only offer less than 1% on CD's according to bankrate.com. So even with costs of insurance factored in you are still making more than you would by investing in a CD at the bank and you have all those additional benefits to go along with it.
It get's even better because when you factor in that you get to grow your money tax-deferred and tax-free versus paying taxes each year on those funds you can grow your money faster.
Reason # 4 - Death Benefits
Last but certainly not least is the protection that comes with the death benefit of life insurance. The death benefit can be used to pay off debts that are left behind, to pay for funeral expenses, to cover kids college education, to pay off the home, to generate an income stream for your family, and a limitless number of scenarios that you may not even think about or consider right now.
We probably could have gone into more detail and wrote a book about all the features and benefits of life insurance. You would have also probably fallen asleep. Although, With all these benefits if you have not taken a look at life insurance lately you may want to stop considering it as an expense and start considering it as an asset and a safe place for your retirement dollars were you can gain some protection and some nice interest.