Four ways to use life insurance in your wealth planning

In times of crisis, perspectives can shift in countless ways, often focusing more on things like life, family and money. That was certainly true of 2020-21, where, amidst the biggest public-health crisis of our lifetimes, insurance suddenly came to the forefront of many people’s minds.

“We’ve absolutely seen a resurgence of people focusing on life insurance,” says Bill Ringham, director of Private Wealth Strategies at RBC Wealth Management–U.S. “The pandemic caused us to focus on so many important things—family, legacy, your estate.”

While that renewed focus has been a good thing, Ringham says, insurance planning should be an important topic for people during ordinary times as well as the extraordinary.

“People shouldn’t be realizing they need more insurance only in the middle of a pandemic,” he says.

According to data from the financial services trade group LIMRA, sales of individual life insurance policies jumped 4 percent in the first quarter of 2022, compared to the same period in 2021. That’s the fastest growth since 1983.

“Often, people will think about life insurance, but then not move forward with it,” says Carol Goetsch, senior product manager for insurance and annuities at RBC Wealth Management–U.S. “There’s an old adage of 50/50: Half of the people who know they need it will actually buy it, and when they buy it, they only buy half of what they really need.”

The result is that many people are underinsured. There are roughly 106 million uninsured or underinsured Americans, according to LIMRA, amounting to 40 percent of the adult population.

But now that seems to be changing, as more people realize the benefits of life insurance in broader financial planning.

Here are four ways to effectively utilize life insurance in your wealth planning:

1. Tailor your insurance policy to your needs

There are several different kinds of life insurance coverage available, including:

• Term policies, which cover a set period—say, 20 years—and then expire at the end of that timespan, while charging relatively affordable premiums.
• “Whole life” policies are a form of permanent insurance, which have set premiums (typically at a higher level than term), are tied to a fixed interest rate, and accumulate cash value at a predetermined rate on a tax-deferred basis. That cash value can be borrowed against if need be.
• “Universal life” policies are another form of permanent coverage, with the cash value tied to rates that are managed and declared by the carrier. As with whole life policies, the cash value can be borrowed against or withdrawn. These policies tend to offer more flexibility, turning the dials on premiums and death benefits as needed.
• “Variable universal life” products, meanwhile, allow the cash value to be invested to potentially produce greater returns (but also potentially greater losses), and so can benefit from rising equity markets. Sales of those offerings have shot up 30 percent in a single year, according to LIMRA, and now account for a 12 percent market share.

If your term period is up, consider converting your term coverage into a permanent plan of insurance. Or, if you’re thinking of canceling your permanent insurance coverage, consider repurposing it, where the cash value would be transferred into a different policy with a different type of coverage, such as providing long-term care protection.

“Sometimes when people reach their 70s or 80s, they don’t think they need coverage anymore and they just cancel the policy,” says Goetsch. “But there are options to repurpose it into a policy that provides them with long-term care coverage.”

2. Don’t limit yourself to workplace insurance

Many people secure life insurance through employer plans and then consider the matter settled. Instead, that workplace policy should be considered just one part of a larger strategy, explains Ringham.

That’s because the median coverage in such workplace plans tends to be a flat sum of $20,000 or one year’s salary, according to LIMRA. Is that enough to safeguard your family in the event of your passing? Likely not.

It’s also not typically portable, so if you move on from your current job or become unemployed, that coverage comes to an end. That’s why having an individual policy outside of work, in addition to any employer offering, can be a wise strategy for your family’s future.

“For most people, having both is a really good idea,” says Ringham. “Take advantage of group term insurance your company may provide you as an employee benefit, often at no cost up to a certain amount of coverage. Sometimes you can even purchase additional coverage which you should compare to premium costs on similar coverage you can purchase outside of your employer.”

“Remember, if you also have some life insurance outside of your employer, you don’t have to worry about changing jobs or changes in your health situation,” he adds.

3. Remember the tax benefits

For high-net-worth families, life insurance can be a critical tool when it comes to the tax burden for heirs. If the value of your estate exceeds state and federal exclusions—currently $12.92 million at the federal level—then the next generation could face costly estate taxes. Those fees could force them into selling assets to cover the bill.

Life insurance death benefits, on the other hand, could help them cover such taxes, and avoid having to liquidate assets.

“Oftentimes people utilize life insurance for estate-planning purposes to make the estate whole and provide liquidity to pay estate taxes if they pass away,” says Ringham. “Estate taxes can cut away at the amount children would inherit, so it’s not uncommon for high-net-worth individuals to have an irrevocable insurance trust that owns policies on an individual or a couple.”

4. Use life insurance as part of your charitable giving

It’s not just heirs who could benefit from a comprehensive life insurance strategy. It’s also a way to leave a legacy with the causes that are most important to you.

There are a few different ways to do that. One is setting up a charitable giving rider, which will pay a percentage of the policy’s value to a charity of your choice. Another is a policy donation, where the charity becomes the actual owner, and can either eventually receive the benefits, or surrender it for the cash value. If your permanent policy sends you dividends every year, you can direct those to charity. Or you can simply name a charity as a policy beneficiary.

“It’s a great way to leverage your dollars for charitable giving,” Goetsch says. “In terms of having $100,000 to give to charity, if you donate it right now, that money is gone. But if you put that money toward buying life insurance [via a single premium, lump-sum payment], that sum could potentially turn into $300,000 or $400,000 in benefits, and you could be leaving behind much more.”

Whatever route you choose for a life insurance strategy, timing is key. Due to age and any health issues you might encounter, securing life insurance at a younger age can make it more affordable and more impactful.

“That’s true legacy,” says Goetsch.