Thursday, February 24, 2005

Estate Planning 101: Why you Need Life Insurance 'Off the Job'

If you are one of those people who think the life insurance they get on the job is enough, think again. Did you know that the life insurance you get through work is a disturbingly low face amount, typically 1 to 2X your annual salary? Did you also know that in most cases, it is NOT portable. If you were to leave your job or make a career change, your life insurance wouldn't go with you. Finally, those looking to put their money to work should know that the insurance given to you by your employers is TERM insurance, meaning ZERO interest is building on paid premiums. It is not enough to work hard and work harder--you have to work smarter. That means not working for money, but putting your money to work for you.

Let’s take an example--say a police officer (with a wife and one child) has 1 million dollars of coverage given to him through his job. Sounds like a lot, right? Wrong. This plan does nothing for him in terms of saving money for his kid’s college education or supplementing his retirement income. More critically, it serves his family absolutely nothing if he were to die while off duty. A heart attack on a Sunday afternoon in the middle of the Jets game? His family won’t be given a dime.

The best course of action for this indiviudal would have been to take out a million dollars in PERMANENT insurance and place it in a life insurance trust. On his passing, we would take that death benefit and allocate it to a financial instrument yielding at least a 5% rate of return. Now we have something like an annuity--5 % off a million is 50,000 dollars. That the income stream his wife will receive every year while she is alive. The principal or bulk of the policy will go to his child, who can now go to college, buy a car, and live the life his father dreamed for him.

And what if this individual doesn't pass prematurely?

Let's say this officer lives a long and healthy life--great. Now he has the ability to borrow against his whole life policy's cash value in his older age to supplement his retirement income. The cash--which has been accumulating all this time tax free-will also be distributed to him tax free. Essentially, he's creating tax free retirement income to offset the 401(K) distributions which he will be taxed on. If he wishes, he can even rollover that cash into a fixed annuity by way of a 1035 exchange, which allows you to rollover assets from one financial vehicle to another one without tax repercussions. That fixed annuity will earn him 3.7% for the rest of his life. Not bad for a retiree wishing to take a more conservative approach with his portfolio.

It behooves you to seek private insurance on your self. Those who think they think they will never die or that life insurance is only for people with dependents, you're way off the radar. If you think you'll never die, please tell me your secret because I'd love to know. Young people have the opportunity to lock in dirt cheap premiums as well as their insurability, so that when they finally do form their own family, they're paying the same low premiums they locked in their early twenties. Finally, there are no guarantees that you will even qualify for life insurance down the road, so don't put off for tomorrow what you can do today. People often say, 'When I buy life insurance I'm betting against myself.' Wrong again--when you purchase insurance, you're betting you'll live but providing an assurance in case you're wrong. And that's thinking wise.

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