Life insurance is a tool that provides financial security to loved ones or your business in the event of an unexpected death. Life insurance can protect, build, and transfer your legacy. 

This article will explore how life insurance can be used to create financial security and what factors to consider.

This article is written as general education, and should not be considered as personal financial advice. If you would like personal guidance with life insurance, you can schedule a time to talk with one of our experts.

Understanding the Main Types of Life Insurance: Term & Permanent

It's important to understand the different types of life insurance because different policy types solve unique financial security issues and vary in costs and benefits.

In general, there are two types of life insurance policies: term, and permanent.

Term life insurance covers a specific period, typically 10 to 30 years, and is designed to provide financial protection in the event of an unexpected death. 

Common uses for term insurance include replacing lost income, paying off a mortgage/large debt, buy/sell arrangements to ensure business continuation, and more. 

Premiums on term life insurance tend to be lower, since most people insured under a term policy outlive the term. In general, 99% of term policies never pay a death benefit.

Permanent life insurance, on the other hand, covers the insured's entire life.

Premiums on permanent life insurance tend to cost more than term insurance because the death benefit will always pay out if the policy is kept in-force. 

Permanent life insurance may also include a savings component that allows the policy to accumulate cash value over time, on a tax-deferred basis. 

Other riders or benefits like long term care/chronic illness benefits may also be available for additional fees. 

Common uses for permanent life insurance include supplementing retirement, funeral/final expenses, estate taxes, special needs trusts, creating a legacy, charitable giving, and more.

Using Life Insurance to Protect Your Family/Business

Life insurance is primarily used to protect a family/business in the event of the insured's unexpected death. 

Families often purchase life insurance to replace lost income and pay final expenses.

Wealthy families may use life insurance to pay estate taxes and fund trusts to create a financial legacy. 

Many families are also interested in the living benefits of life insurance.

Financial advisors usually recommend a permanent cash value accumulation policy to supplement retirement funds to those individuals who are maxing out their traditional retirement vehicles and still have funds they would like to save for retirement.

Families may also benefit from long term care or chronic illness hybrid policies or riders that allow the insured to access a pool of money while they are still living to pay for their care. 

Business owners can purchase life insurance policies for themselves or key employees to ensure the business can continue operating in the event of an unexpected passing. 

Life insurance can be used businesses to fund buy-sell agreements, ensuring that the business can be sold or transferred in a tax-efficient way to the appropriate partners when one partner passes. 

Life insurance is also often used by business owners to attract and retain key employees. 

Factors to Consider When Using Life Insurance to Protect Your Family/Business

The above is in no way a comprehensive list of uses of life insurance to protect your family/business, as life insurance can be used for a wide range of purposes.

Budget is a very important consideration in which type of insurance may be right for you or your business. 

Your health or underwriting category should be carefully considered when choosing a life insurance policy.

Different insurers like different risks, which means that certain health conditions might be more favorably treated with certain insurers than with others. Be sure you are choosing the carrier that best fits your health, avocation or occupational risk. 

When shopping for term insurance, it is important to understand that price is not everything, and policies may feature different benefits. In some cases, higher premiums may equate to benefits or features that you may want/need.

Examples include the ability to convert your contract from term to permanent without evidence of insurability; or living benefits that allow you to access the death benefit, while the insured is still living if they are terminally ill or permanently confined to a nursing home.  

With permanent policies, keep in mind that accessing cash value from a policy or filing a claim on living benefit riders while the insured is living may affect the death benefit that would pay out upon passing, and may have tax consequences if the policy isn't properly structured or funded.

Using Permanent Life Insurance to Build Wealth

Permanent life insurance policies, such as indexed universal life or variable universal life insurance, can be used as savings vehicles to help build wealth. 

These policies include a cash value component that grows over time and can be accessed through policy loans or withdrawals. 

One of the key benefits of using permanent life insurance to build wealth is that the policy's cash value grows tax-deferred, meaning that the policyholder doesn't have to pay taxes on the growth until they withdraw funds beyond the cost-basis, or cancel the policy.

If properly structured, money from the cash value in a permanent policy can generally be accessed without paying any income or capital gains taxes when you access them. 

Unlike other accumulation vehicles, life insurance is a self completing savings plan.

This is because it provides a death benefit that will be paid out if the insured passes away during the accumulation years, which ensures that the savings goals will be met.

Factors to Consider When Using Life Insurance to Build Wealth

When considering using life insurance to build wealth, there are several important factors to consider.

First and foremost, the policy should fit within your overall financial plan, as you will need to be able to maintain premium payments.

Additionally, it's important to be aware of any fees associated with the policy, as these can impact its overall return on investment. 

The policy should also be flexible and allow you to adjust the coverage and premiums to meet your changing financial needs.

You should also consider the policy's cash value growth potential and tax implications during your lifetime and after your death. 

It's also important to choose a policy from a financially strong insurance company and ensure that it the solution aligns with your overall financial goals and risk tolerance. 

Working with a financial professional can help ensure that you are making informed decisions that meet your unique needs and circumstances.

If you would like personal guidance with getting a life insurance solution to build wealth, you can schedule a time to talk with one of our experts.

Using Permanent Life Insurance to Transfer Wealth

Permanent life insurance policies, such as whole life or universal life insurance, can be used to transfer wealth. 

Many wealthy families use permanent life insurance to pay estate taxes, fund trusts, or equalize the estate.

Closely held businesses may use the cash value accumulated in a life policy or the death benefit to help fund the transfer of ownership of the business.

Factors to Consider When Using Life Insurance to Transfer Wealth

Ownership at application and beyond is extremely important as improper structuring could result in the inclusion of the policy in the estate, and if the estate is too large that could cause the death benefit to become taxable. 

So called Second-to-die policies are often used in transferring wealth because they do not pay out a death benefit until the second of two insured persons passes away. This can drive down costs but may not be appropriate if the death benefit is needed upon the first insured's passing.  

Estate taxes can and do often change. The current federal estate tax is set to sunset at the end of 2025. 

If you or your spouse are not US citizens the federal estate tax rules are very different from those who are citizens.  

If you are developing a wealth transfer plan it is important to work with an experienced estate planning attorney, tax advisor, and financial advisor to ensure that the plan is set up and executed correctly. 

Conclusion

Life insurance can be a powerful tool for protecting, building, and transferring your legacy. 

By understanding the benefits of life insurance and the different types available, individuals can use it to create financial security for their families, protect their businesses, and even supplement retirement.

However, it's important to carefully consider the policy's affordability, fees, and flexibility before making any decisions. 

Doing your research and consulting an independent financial professional can help you make informed decisions that align with your financial goals.

Don't wait until it's too late. Get a free personal plan today and protect your family's financial future with our wide range of life insurance solutions, straight from America's top insurers.

White Swan offers various plans to suit your needs and budget. From term life insurance to permanent life insurance, we have options that can help protect your family's or your businesses’ future!