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A few months ago, after having my first child, I turned to my partner in a panic. “We need to get life insurance as soon as possible,” I told him.
For years, we toyed with the idea of each getting a life insurance policy, but now that our family had expanded, it just felt necessary. I wanted to make sure my partner and I both had financial assistance in case something happened to one of us, especially now that we had a baby.
Plus, securing our policies now is a smart move. “The earlier you get life insurance, the lower your premiums will be since pricing is determined by health and age,” CPA and life insurance advisor Hoang Anh Le told me. “Purchasing it earlier translates to lower fees, allowing policyholders to save more in their cash value and giving their investments greater potential for growth.”
I chatted with Le about how different life insurance policies, especially those with living benefits, can benefit people financially.
Life insurance can provide extra financial security during health challenges
I’ve tried to emergency-proof my finances as much as possible. I have a good health insurance policy to cover medical expenses and a high-yield savings account with a few months of income in case something happens to my job. However, during retirement when my income becomes more fixed (and I rely on Social Security payments and money from my SEP IRA), an unexpected health challenge could put a dent in my finances.
Le said that having a life insurance policy with living benefits could help me with financial support during health crises, from injuries to illness.
Living benefits are life insurance riders attached to term life insurance or permanent life insurance policies that enable you to access your death benefits while you’re still alive, in certain circumstances. They are also known as accelerated death benefits and can help a person out financially if they are diagnosed with a terminal, chronic, or critical illness.
“For example, if a person finds out they have cancer or Alzheimers, living benefits can cover medical care, in-home caretakers, household expenses, and more,” Le told me. “During retirement, you might have to continue paying your mortgage and other expenses. You don’t want to have to dip into savings or retirement accounts to pay for medical expenses that aren’t covered by Medicare.”
Life insurance policies with living benefits typically have higher premiums than those without the benefits, and using the death benefits while alive will reduce the amount available to your beneficiaries upon your death.
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Some life insurance policies offer tax-advantaged retirement income
I didn’t start saving or thinking about a retirement plan until I turned 30. Because of that, I’ve always felt like I was behind. But Le said that when structured correctly, some permanent life insurance plans allow policyholders to access their cash value, tax-free, providing them with an additional source of retirement income.
“When you’re retired and you feel like you could use additional funds, you can take a loan out of your life insurance policy to supplement your income,” said Le. “That distribution is tax-free. However, it will lower your death benefit, which impacts how much your beneficiaries will receive from the policy once you pass away.”
Your life insurance is shielded from market downturns
The money I have in my retirement account, which is inside a SEP IRA, fluctuates as the market goes up and down. But Le said that certain life insurance policies have a 0% floor protection, which means you’re guaranteed a minimum rate that’s credited to your cash value. If the market goes down, your cash value isn’t affected.
“Having a policy like this helps shield policyholders from market downturns,” Le said. “This ensures your investments remain secure even in turbulent economic times.”
While a portion of my retirement savings portfolio is impacted by the market swings, having a life insurance policy that remains unaffected is a great way to have a reliable amount of funds to access when I retire.