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Optimizing Life Insurance for Maximum Financial Security and Future Wealth

May 22, 2024

When planning for the future, particularly for pre-retirees, understanding how to optimize life insurance coverage is essential. Achieving the "maximum" amount of coverage effectively does not mean ensuring that your life insurance coverage “meets your current needs.” If it did, you’d find a way to minimize and rationalize your way into buying as little as possible because who wants to buy something where you have to die to make it work? Since we don’t know what our “future needs” will be, it only makes sense to start with owning the “MAX” and acquiring it in a way that does not generate any additional out-of-pocket outlay, if possible.

Understanding "Maximum" Coverage in Life Insurance

Most financial practices talk about "maximum" coverage in life insurance as adequately reflecting the financial needs your dependents might face in your absence. This includes immediate expenses like funeral costs and debts, ongoing living expenses, and future financial obligations such as college tuition or retirement savings for a surviving spouse. However, this needs-based approach typically accomplishes less than half of what a person could own. If you could get life insurance for free, how much would you take? The answer is usually, “as much as they’ll give me.” The problem is that nobody has shown people how to effectively and efficiently acquire life insurance without putting them in the poor house—until now.

Term Life Insurance or "Death Insurance"

Term life insurance provides coverage for a specific period, offering a death benefit that can help ensure financial stability for beneficiaries if the insured passes away during the term. The problem with this as a long-term strategy is that you may outlive your coverage, and when you do pass, zero goes to your family, business, or charity. You've wasted money on premiums unless you die within the coverage period. That's why I call it “death insurance.” Only 2-3% of all death claims are paid out from term or group term life coverage. While it's better than nothing and suitable for those starting out, paying off bad debt, building up liquidity, and wanting to lock in the ability to convert the term coverage to permanent coverage in the future, it's not the ultimate solution.

All life insurance carriers use a multiplier of income based on your age. For example, a 45-year-old person can own up to 20 times their income. A person earning $150K annually qualifies for $3,000,000 of life insurance. It’s that simple. Save yourself the hassle of trying to figure out how much death benefit you’ll need and go for owning the “max.” Rely on a professional at J. Arthur to show you how to acquire it and still enjoy your lifestyle.

Whole Life or Permanent Insurance

Whole life insurance offers lifelong coverage, guaranteed level premiums, a guaranteed death benefit typically to age 120, tax-favored cash value, and dividends that, once paid, you can use as an income buffer in volatile market conditions to reduce your premium or as tax-favored income later in life. You can do this without losing your initial death benefit. The real power rarely mentioned in the financial world is how the death benefit becomes a living benefit—a permission slip to freely spend and enjoy your wealth and other assets and still be able to pass them on when you’re gone. Some policies offer liberal chronic illness and terminal illness riders that allow for early use of the death benefit while you are still alive if you meet certain conditions. The permanent death benefit is like putting a turbocharger on an engine—it just goes faster and better with more horsepower.

Once people understand these benefits, they quickly want to incorporate a valuable piece of property like whole life to accompany their other assets. It goes from talking about a death “need” to actually wanting whole life as an asset. You should focus on living and prospering while still protecting your assets and loved ones.

Achieving Maximum Coverage without Additional Costs

Expanding life insurance coverage to its maximum potential without increasing costs can be challenging but achievable with strategic planning:

Assess and Adjust Coverage Periodically

Regularly review your policy to ensure it continues to meet your needs and adjust as necessary.

Utilize Policy Features

Many whole life policies include features that allow policyholders to enhance their coverage:

  • Automatic Increase Riders enable the death benefit to grow, keeping pace with inflation or changes in financial circumstances without the need to undergo further medical underwriting.
  • Paid-Up Additions can be purchased using dividends, increasing the death benefit and cash value without raising out-of-pocket costs.

Consult a Professional

Partner with a professional like J. Arthur Financial to tailor your life insurance effectively. They can provide insights into how different policies work together and suggest adjustments to maximize benefits while keeping costs in check or even helping you recover costs.

For pre-retirees, life insurance is not just a policy—it’s a crucial part of a comprehensive financial plan. Whether it’s term for initial coverage or whole life insurance, maximizing your coverage effectively ensures that your financial legacy is secure, providing peace of mind that your loved ones will be cared for. And giving you that huge permission slip to spend, enjoy, and pass on your wealth. By regularly reviewing your policy, leveraging its features, and working with financial professionals, you can achieve optimal coverage that supports your financial goals without the additional financial strain.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure you are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges; if a policy is surrendered prematurely, there may be surrender charges and income tax implications. You should consult a qualified tax professional for tax advice on your own personal situation.  All guarantees are based upon the claims-paying ability of the issuer.

Optional riders and benefits may be subject to eligibility requirements, additional premium requirements and/or minimum or maximum coverage amounts.  Availability and rider provisions vary by each state.

 Accessing cash values may result in surrender fees and charges, may require additional premium payments to maintain coverage, and will reduce the death benefit and policy values. Loans are income tax free as long as policy is not a “modified endowment contract” (MEC) and policy must not be surrendered, lapsed, or otherwise terminated during the lifetime of the insured, and withdrawals must not exceed cost basis. Partial withdrawals during the first 15 policy years are subject to additional rules and may be taxable. Excess policy loans can result in termination of a policy.  A policy that lapses or is surrendered can potentially result in tax consequences. You should consult a qualified tax professional for tax advice on your own personal situation.  All guarantees are based upon the claims-paying ability of the issuer.