Life insurance can feel overly complicated to many people. To compensate for that feeling, it’s often viewed as little more than a grownup expense procured with the hope that a significant length of time will pass before it’s used, since common wisdom assumes a life insurance policy’s sole purpose is a practical, pre-determined payout after death.
It’s something the one whose name it is in will personally never see, and really, the whole prospect of your loved ones dealing with it after you’re gone is such a bummer, most of us would rather not to consider it at all. While this somewhat morbid and overly basic understanding of life insurance bears some relationship to the truth, it certainly isn’t the only way in which a life insurance policy can be used. If you’re curious about the ways in which you might be able to utilize your life insurance policy other than as a strict payout upon death, here are four options you should know about.
1. Fund Bequests
Because a life insurance policy can also function as a cash stand-in for an asset, a fund bequest is a great way to use your policy. It can help you solve problems of liquidity when you’re concerned about issues of fairness as they relate to property and cash among your heirs after your death. For example, say you have a property that is valued more highly than the savings you have, and only one of your children is interested in keeping it in his family. By getting a life insurance policy that’s equal to the value of the property, upon the settlement of the will, the child who wants the property and the one who does not can both be given the same amount of inheritance. A life insurance policy used in this way is all about investing for the future, and Alliance Financial Life Insurance can help you.
2. Maximize Your Pension
For people who find themselves in a position where they are using a pension or savings in a way that differs from the ways in which they had originally anticipated, a life insurance policy can provide something of a buffer. Say medical bills or other unexpected expenses force you to take out a reverse mortgage or second mortgage in order to make ends meet. By paying into a life insurance policy every month in addition to the mortgage, you can maintain your home’s value for your children while still ensuring you have a place to live. Also, if a pension ceases upon death and leaves a surviving spouse without an adequate income, a life insurance policy can be a buffer against that end. Of course, the earlier you start paying into it, the more money the surviving spouse will get.
3. Pay for College
If you’ve chosen to fund a whole life policy well enough, you can put it toward a relative’s college expenses. While a college fund or 529 is a better choice — whole life insurance policies, if used early, will be pricey in terms of fees and administrative expenses — the skyrocketing expenses of college may leave you with little choice. One advantage of using the policy in this way is that financial aid programs won’t take a life insurance policy into consideration when calculating grants and other benefits. Of course, you can also give the maximum annual tax-free gift to children or grandchildren in anticipation of college as well. If you’re nervous you won’t provide enough for their full education in the time you have left, simply insure yourself for the total amount, and on your death, you can provide what’s still needed.
4. Transfer It
While there are some tricky rules in relation to the CRA, one great way to avoid estate taxes that may be levied against your life insurance is to transfer the policy to someone else. That way, upon your death, you can pass the payout on to your heirs income, tax-free and estate tax-free. In a nutshell, so long as you aren’t listed as the policy owner upon your death, the policy won’t be viewed by as part of your estate. You can also accomplish the same end by placing the policy in an irrevocable trust.
It’s true that life insurance can feel like a tricky business — matters of death and taxes often are. However, by getting creative, you can actually enjoy a wealth of benefits that go far beyond the straightforward payout of just cash upon death.