Editors' pick: Originally published Nov. 3.
By definition, life insurance is a financial cushion that pays out in the event of the policyholder's demise - it's a safeguard that protects loved ones when the unexpected occurs.
But increasingly, life insurance has morphed into a financial planning tool that does much more than offer financial protection to loved ones.
"Life insurance has many other uses that most people don't realize," states Life Happens, a non-profit insurance industry group, in an email to TheStreet. "As long as you pay your premiums, permanent life insurance provides lifelong protection and accumulates cash value over time. As a result, individuals can take advantage of these benefits to help fund life's many possibilities."
How can life insurance brighten your financial picture? For starters, Life Happens offers these benefits - all worth a look:
- Contribute to a college education: Borrowing against the cash value of your policy can provide the funds needed to pay for college or other secondary education.
- Fund a business: Starting a business from scratch is hard. Aspiring business owners can look to the cash value of their policy as a source of initial funding to get their business off the ground.
- Take time off to care for elderly parents: While you can't control the timing of family emergencies, being prepared financially by having life insurance enables you to tap into the accumulated cash value of your insurance policy to take time off to take care of loved ones.
- Provide funds if you have a chronic illness: Some life insurance policies allow you early access to your death benefit if you become chronically ill and can no longer perform tasks of daily living.
- Grow your retirement savings: Since life insurance serves as a financial safety net, you can take a more aggressive allocation strategy in your 401(k) investments and use the cash value of your life insurance policy let your retirement funds grow longer.
"Life insurance is like a Swiss Army knife - it has utility beyond compare," says Joseph Templin, managing director at Lamp of Castle Holdings, Inc., in Ballston Spa, N.Y. "On an after-tax, risk-adjusted basis, cash value life insurance from a strong mutual company is the most efficient wealth accumulation tool available in the United States."
Insurance industry insiders agree.
"While life insurance is first and foremost an insurance based product, there are many non-insurance aspects of life insurance contracts that many consumers may be unaware of," notes Divam Mehta, founder of Mehta Financial Group, LLC, in Glen Allen, Va.
Retirement savings may be the one area where life insurance can really provide a boost.
For example, in permanent products, cash value accumulation occurs on a tax-free basis similar to Roth IRAs, Mehta says. "For many high-net-worth individuals who earn too much to contribute to a Roth IRA, permanent cash value policies can be a great alternative as it can provide many of the same tax benefits as a Roth IRA," he explains. "Just as contributions to a Roth IRA will not be tax-deductible, premiums paid into a life insurance contract are not tax deductible. Furthermore, permanent life insurance policies also allow for tax-free distributions similar to a Roth IRA. As such, permanent life insurance policies can be a fantastic retirement planning tool for high net worth individuals who are unable to make Roth IRA contributions, or for individuals who prefer to have a disciplined approach to savings."
It's access to often much-needed cash that also gives financial consumers leverage.
"All forms of permanent life insurance have a cash value component," says Anthony Martin, an insurance agent at Choice Mutual.
Martin is a big advocate of using life insurance for college planning purchases. "Essentially, the parents take out a permanent life insurance policy that insures the child," Martin says. "Because the child will be young and very likely healthy enough to qualify for the best health class possible, the cost of the insurance will be incredibly low, due to very low administrative costs."
Once the policy is in place, Martin advises the parents to contribute as much money into the policy that the insurance company will allow, or whatever amount their budget will allow. "By over funding the policy, the rate at which the cash value grows will be exponentially faster compared to if you merely make the minimum monthly payments. By the time the insured child is at college age, the compounding growth over the years will have yielded a fund suitable to pay for college," he adds.
Life insurance companies are getting into the act, too, with offer benefits that go beyond life insurance protection.
For example, last year, John Hancock introduced what it calls an "industry-disruptive" John Hancock Vitality program, a program that rewards life insurance policyholders for living a healthier life.
"The program offers policyholders significant savings and rewards, including up to 15% off annual premiums and, new this year, savings of up to $600 per year on groceries - for their healthy everyday habits like buying healthy foods, seeing the doctor and staying active," says Brooks Tingle, senior vice president of marketing and strategy at John Hancock Insurance.
The policy comes with a free Fitbit as an incentive to stay engaged, and policyholders can also earn discounts on cruises, half-price hotel stays at Hyatt, discounts on healthy gear at REI, as well as gift cards from Amazon, Starbucks and others, Tingle says. "We want to help individuals connect their financial well-being to their long-term health and encourage them to live life well, right now," he says.
It's worth a consumer's time to delve into some of those extra benefits that come, part and parcel, with life insurance policies. They likely offer more benefits than you might think.