Insurance is a crucial element in financial planning, but why is that the case? An insurance plan is an important aspect of any good financial plan because it provides a hedge against adversities in life. It assists in making certain that your financial objectives remain on track in the event of an occurrence of an event.
Financial planning is not a one-time thing and neither is insurance. An ideal plan assesses the income that you have and the investment that you can make, goals for the future and the risks that may be involved. It is also reviewed periodically and its content may also change from time to time. Here in this blog, let’s explore how insurance works in association with financial planning to give lifetime protection.
Why is Insurance Important in Financial Planning?
In life, we should always prepare for surprises!
That’s where insurance comes into play, depending on the insurance, it helps cover your assets and income, thus reducing the probability of large losses. In case you or a member of your family, for example, gets into an accident, falls ill, or experiences a natural disaster, you’ll need to be protected.
It provides for the family’s financial needs in case you are no longer around to provide for them, they are able to pay the mortgage and other expenses. Getting insurance services is a good way of protecting your family since it integrates into your financial plan and when you get it, you feel relieved since you have done your part.
Why Insurance Should be Part of Your Financial Plan
Insurance has many important uses for an individual financial plan and it can act as an investment tool, make a financial plan more predictable, offer tax benefits, and help mitigate risk. Both are used to build a good financial structure.
1. Insurance can be used to diversify the investment portfolio
For instance, if you are in a high-income tax bracket and have exhausted your qualified retirement plan contributions, then a cash-value life insurance policy is another good way to achieve tax-deferred growth. When necessary, you can do so without paying tax, because you are reclaiming what rightfully belongs to you. And then it’s policy loans which are not considered reportable income and therefore you can transition to those.
It actually becomes a de facto tax-free distribution on the back end. It assists with income tax mitigation and control as it is being built and when you are accessing money on the backend.
2. Insurance can help to introduce stability and certainty to the anticipated budget
Another advantage of insurance is that it can bring stability into your legacy and estate planning. Investments, real estate business, interest and other investment securities are examples of assets that can fluctuate in value. Life insurance policy brings certainty into the lives of the policyholders. Death benefits of life insurance do not fluctuate in the same way that other segments of the estate plan do, so that will not be a problem.
3. Insurance may provide tax benefits
Apart from the tax benefit of getting investments to grow inside a cash-value life insurance policy, other insurance tax benefits can be drawn when an insurance plan is properly coordinated.
As for the majority of the situation, the amount of money received by the beneficiary as the death benefit does not attract income tax. For the individuals, who will be leaving behind the direct heirs, who would have to pay the federal estate tax, or residents of the state, which has a state estate tax, the placement of an insurance policy within an irrevocable trust can help avoid the estate taxes.
That results in an asset that is tax-sheltered from the income point of view of death benefit and is state tax-free since it is held in irrevocable trust beyond your estate.
4. Insurance can lessen risk in your financial plan
One of the most common reasons why people have life insurance is to mitigate purposes. People should indulge in acquiring life insurance policies because in case the breadwinner in the family dies, life insurance provides for the monetary loss left behind.
However, life insurance can manage risk in other methods. For example, let’s do the risk comparison between investing $10,000 per year for 10 years in a traditional investment versus using that amount to “overfund” a $200,000 cash-value insurance policy. If you choose the traditional investment and for some reason die after only two years, your successors will be paid for the amount equivalent to $20,000 that you invested. If you choose insurance, on the other hand, your family would receive the full $200,000 of death benefits.
Additional risk mitigation benefits are provided with some life insurance policies. For example, some can be set up to pay cash for long-term care. Cash for living expenses can be provided by others while the policyholder is still alive. An individual should not have life insurance as the only risk mitigation tool. The third leg of the stool is having cash value life insurance. If you use it in conjunction with other investment tools, it will become beneficial down the road.
Of course, other types of insurance help offset other types of risks in other ways. Auto and home insurance reduces the chance that we will lose those assets, and disability insurance helps a family if the main income earner cannot work because of an illness or injury.
One of the more neglected insurances is disability. Your average working individual relies on their employer-provided disability. In a lot of instances – particularly for people who are highly compensated and have compensation in the form of stock options or something like that – it should be discussed in financial planning that you have this as a supplement to that. Life insurance should not be the only risk mitigation tool an individual has. Having cash-value life insurance is the third leg of the stool. It can become beneficial down the road, but only when it’s used in combination with other investment tools.
Talk to an Insurance Expert You Can Trust
You need to speak to someone you trust, an insurance advisor.
You want to be able to relax and know that you’ve got your family covered. However, you don’t want to overpay for insurance. Make sure to speak to someone reliable and trustworthy.
They can also help you with insurance. If your advisor is in a fiduciary environment this can be a good route to go. At that point, they have to give you the best advice and not just sell you the highest-cost product.