Everyone knows what a life insurance policy is - it's an insurance contract in which an insurance company promises to pay out a monetary benefit to policy beneficiaries after the insured passes away, as long as premium payments are paid consistently and no misrepresentations are made on the application. Based on that definition, you can tell that life insurance is a pretty straight-forward policy, but that doesn't mean it can't be used as a sophisticated financial planning instrument. There may be some things that you don't know about life insurance that could help to fortify your financial plan against certain risks and give you access to additional cash when you need it.
Cash Value LoansIf you have a permanent life insurance policy and you need money for almost anything - paying taxes, supplementing retirement or college savings, funding a medical treatment or paying for a dream vacation, you can take a loan out of your life insurance policy's cash values in order to satisfy that need. Cash value loans are tax free, since they aren't considered gains but loans that you need to pay back, and interest is paid back to your policy rather than a lender. Just remember that if you don't pay back the loans before the death benefit is paid out, it will reduce the proceeds that your heirs receive.
Accelerated Benefit Rider
If you should be diagnosed with a terminal illness, you can access a percentage of the death benefits of your policy before you pass away if you have the Accelerated Benefit (sometimes called the Terminal Illness) rider. This can help defray some medical expenses and living expenses when you are no longer able to work, and can help you and your family stay comfortable financially during this difficult time. It is important to note that using this rider will greatly decrease the death benefit your heirs receive since it is accelerating a portion of the benefit to be received prior to the insured's death.
Decreasing Premiums/ Death Benefits
Term insurance policies offer a death benefit for a limited period of time. They are often used to cover temporary, large debts like mortgages because the term of the policy's benefit can be chosen for the number of years that the debt will be outstanding. But term policies are even more flexible than that. You can design yours so that the death benefit decreases over the years, much as your mortgage balance will, or you can design it to have decreasing premiums.
Variable Subaccounts
When you invest in a variable life insurance policy, there are subaccounts that you can pick from to invest your cash values in. These subaccounts are created from underlying investments like stocks, bonds and money markets. They can vary in risk, volatility, and growth depending on how the underlying assets perform. If you become unhappy with the performance of one of your subaccounts and you wish to make adjustments, you can. Additionally, you can allocate a percentage of your cash values to multiple subaccounts.
Probate-free Death Benefit
Unless your assets are in a trust, your estate will need to go through probate after your death. Even if you have a will and no one who can contest it, your heirs will be forced to wait until after probate to receive your estate. Life insurance proceeds, however, do not need to go through probate unless the estate is named as the beneficiary.
The Bottom Line
Your life insurance policy can be as simple as you want it to be, or it can be a complex product designed to complement your overall financial plan and hedge against losses, terminal illness expenses and probate. It's up to you to design a policy that works the way you need it to, either as a simple death benefit or a sophisticated planning tool.
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