24 June 2014 0 Comments

Misconceptions About Life Insurance (Part 3)

shutterstock_113824207This continues my summary of the most common misconceptions about life insurance.

Buying Term Insurance is like throwing your money down a rat hole.

It’s true that only the insurance company wins if you buy term insurance and don’t die prior to the end of the term.  Likewise, if you buy fire insurance on your house and don’t have a fire, you’ve lost the entire premium, but you still buy fire insurance and don’t feel cheated if you don’t have a fire.  Term insurance does not build cash value and if you live too long there will probably be no benefit paid to anyone, but it’s still the least expensive way to get maximum protection during your earning years when those who you care for need the most protection you can afford.

Using Life Insurance to supplement retirement income makes no sense.

Once you have purchased the full protection you need and have contributed to any available 401k plan in an amount sufficient to maximize your employer’s contribution, if you are looking for investment opportunities to supplement your retirement, properly funded life insurance can provide some very unique advantages.  You can accumulate earnings without paying taxes, receive income free of taxes and ultimately have any remainder proceeds paid tax free at your death.  This is not a short term program and should probably not be considered if you have less than 15 years to go before you retire.  I have written profusely on this subject; enter Indexed Universal Life on search to learn more.

Life Insurance premiums are tax deductible.

Life insurance premiums are not tax deductible, but remember the death benefit is paid free of income tax.

Life Insurance proceeds are not subject to federal estate tax.

There is a way to avoid having the death benefit of a life insurance policy escape federal estate tax, but if the deceased had any incidence of ownership of the policy the proceeds are included in the estate and based on current tax rates if the total net estate, including the life insurance, exceeds $5,400,000 ($10,800,000 for a married couple) there is a 40% tax.  Still, life insurance is a very effective way to provide cash with which to pay estate tax and this is accomplished by placing ownership of the policy in an Irrevocable Life Insurance Trust (ILIT), so that the proceeds are not added to the estate’s value and are not taxed.

If I want Mortgage Insurance the best way to get it is through the lender.

So called Mortgage Insurance that pays off the balance of your mortgage at your death is Life Insurance.  Lenders are using the information they have about your new mortgage to motivate you to buy.  Nothing wrong with that as long as what you are buying is competitively priced and fits into your total life insurance program.  Single needs agents tied in with mortgage lenders seldom meet both of these requirements, so I advise you seek advice from an independent agent…and don’t buy decreasing term insurance.

Continuing with more common misconceptions about life insurance, next I start with why you’ll want to buy life insurance when you’re least likely to need it.

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