Buying insurance can feel a little like taking your vitamins. You probably know it’s a good idea in the long term, but it can still be a tough pill to swallow. Most people know that without insurance, their dependents would face potentially deep financial hardship if you were unable to work (or worse) due to some unfortunate event. So buying insurance can be a cost-effective way to protect your dependents.
There are many different types of insurance that might fit your needs and lifestyle. For example, term insurance is a kind of life insurance that provides coverage for a defined time period. In the event of your untimely death during the specified period when the policy is active, the insurer will pay a defined amount to your beneficiaries. However, it leaves no residual value to you or your dependents if such an event does not occur. If you buy enough of this type of coverage to help replace your income, then you may feel like you checked a box and fulfilled your responsibility as a provider.
It turns out, however, insurance can help you do a lot more than check off boxes. Indeed, insurance could help you work toward your long-term financial goals, if the use of certain strategies aligns with your objectives and risk tolerance.
The Retirement Connection
Other kinds of insurance, such as long-term care and cash value life, may help to strengthen your retirement plan, due to their tax treatment and risk mitigation features. Here’s how these two types of insurance can be a useful part of your overall retirement plan.
- Long-term care insurance: These policies help provide for the cost of long-term care services, including home care and assisted living. You can buy this to protect your retirement savings from the possibility that you might one day need to hire professional caregivers, which, depending on the level of care required, could rapidly deplete your retirement savings.
- Cash value life insurance: This type of life insurance (which includes universal life and whole life policies) typically costs more than term, because it incorporates a savings or investing component that you can tap in certain situations while you’re still living, possibly without triggering any tax liability because the cash value component grows tax-deferred. That makes these types of policies an option for those individuals (a small segment of the general public), who have put the maximum amount in their retirement plans and still have more money they would like to invest tax-deferred. You may be able to borrow against the cash value, and a certain amount can often also be withdrawn without penalty, allowing the policy to function as a kind of backstop against emergency retirement expenses. And, of course, if they never tap that cash value during their lifetime, it passes income-tax-free to your named beneficiaries. Some investors may include a cash value life insurance policy as part of their estate planning in conjunction with trust accounts.
It Can Get Complex
Our finances and goals are deeply connected, so using insurance as a savings and investment strategy can impact how you may want to structure and invest your assets alongside such policies. Because this can get complex, you may want to consider working with a Financial Advisor to review these kinds of strategies as part of a comprehensive retirement plan.
If you aren’t ready for that step, you may be able to purchase these kinds of insurance policies through your employer or online. Just make sure that you are buying policies from high-quality issuers that offer premiums you can afford and that align with your needs. Checking those boxes can help you to both fulfill your obligations to your dependents and achieve your long-term goals.
