How Should You Be Planning Ahead for Your Loved Ones?
Americans lost 25% of their wealth during the 2008 Stock Market crash. Some 401(k) plans lost up to 40% of their value. The losses were so sudden and so huge that it caused us to rethink how we invest and how we plan for our retirement. During the fast-paced economic days of the 80′s and 90′s, the stock market was the place to be. When it came to life insurance, the word was “buy term insurance.” It’s cheap. Don’t pay high premiums for cash value life insurance. Invest your money in the market instead.
Now, the 401(k) plans still have not regained their losses. People are frightened of the market. Retirement plans have been shattered. Many people are wondering if they will have enough money to retire. If they need money and take it from their 401(k) plans, they must pay interest, taxes and penalties.
Term Insurance vs. Cash Life Insurance
People have now shifted their thinking. They want a steady income during retirement. It is true that term life insurance is cheap. It is true that cash life insurance costs more. It is true that the accumulated returns on the policy are not as high as some dividend paying stocks.
But let’s look at the opposite side of the ledger. Cash life insurance provides a steady income. You can withdraw money without paying taxes. You can borrow and not have to repay the loan. If you let the policy accumulate cash value, your heirs will be assured of a set (face) amount without having to pay taxes on the proceeds.
Here is an example: A husband and wife both work. Both retire and both receive Social Security and their pensions. Suddenly, one spouse dies. The surviving spouse is left with a sudden loss of income. With a cash value life insurance policy, the surviving spouse can borrow on the policy, continue to pay the bills and live comfortably. The face value will be reduced by the amount of borrowings.
Another key advantage of a cash value life insurance policy is the tax benefit. Policyholders can leave their heirs a substantial sum of money tax free. If the face value of a policy is $2,000,000, the heirs receive $2,000,000 tax free. This is provided the heirs, and not the estate, are named as beneficiaries. If the beneficiary is the estate, then the proceeds may be subject to estate taxes.
Compare this to a term policy. A 20-year term policy expires after the term with no benefit. As a person gets older, the premiums increase. Also as a person gets older, he/she may be burdened with an illness. In some cases like these, insurance companies will not even issue a policy.
People have different needs and goals. They must analyze every option and decide how they will structure their retirement income. For some, term life insurance may be the right choice, while others may want the security of knowing they have an asset that is growing and one they can borrow from if need be. They also want to provide financial security for their heirs. The best way to assure this would be through a cash life policy.