How to Use Life Insurance To Protect Your Wealth

Originally Published Nov. 24, 2014

As a self-employed contractor in his 30s, Don Wachtel worried about how his Greenport, New York, family would survive if he became incapacitated or died. He had a wife, Tonia, who worked as a certified nurse’s aide, and two daughters. Don shared his concerns with a close friend who happened to be an insurance agent. In turn, Don’s friend suggested that they have a detailed conversation about life insurance. “This was way before he was diagnosed with a brain tumor” says Tonia.

The Wachtels bought a life insurance policy that included an accelerated death rider, which allows families of terminally ill policyholders to receive part of the benefit before the policyholder’s death. “When we first got insurance, we were afraid that we wouldn’t be able to afford it,” Tonia reflects. “Turns out, the insurance wasn’t that expensive. The couple paid $280 every three months for a $500,000 policy.

After Don fell ill, the policy’s accelerated death rider enabled Tonia to take an eight-month leave of absence from work to spend time with her husband as he neared the end of his life. He died in July 2011. Tonia is now 40 and her daughters, Alexis and Paige, are 19 and 12. “With the insurance I was able to keep the business going for a while. [She later closed it.] It allowed me to pay my mortgage and other bills, but most importantly, I was able to have a little healing time with my girls after their father passed.

As the Wachtels’ story illustrates, we all need to prepare for life’s unknowns. Being financially prepared for a breadwinner’s death, among other calamities, saves families from the added grief of losing necessary resources to maintain their standard of living. Life insurance continues to be a powerful tool for safeguarding one’s income and wealth.

Life Insurance Through the Ages
Life insurance is critical at any age. In data from LIMRA, a worldwide research organization that works with the insurance and financial services industries, 37% of Generation Y (generally, those born between 1981 and 1999) African Americans surveyed say they own individual life insurance, lower than either black Gen Xers or baby boomers. “Yet, the group most likely to buy life insurance in the next 12 months is Gen Y at 47%, the highest among the three generations,” says Nilufer Ahmed, Ph.D., senior research director for insurance markets at LIMRA. (See chart)

Antaun Barnett, a life product consultant at New York Life, agrees. “A prudent decision would be to lock in one’s insurability as soon as possible. There is a time when it becomes too late to get started because of health issues and affordability of coverage. Everyone should get started early,” Barnett says.

Young, forward-thinking singles might buy life insurance because rates are generally lower for the young and healthy–and they may eventually get married or have children, says Chad Cooper, a Prudential financial professional in Albuquerque, New Mexico.

“Permanent life insurance would provide a policy that generates cash

value, which can generally be drawn on tax-free,” he says. Purchasing a home may be another good reason for a single person to buy life insurance. If a parent co-signed on a mortgage and the single person dies, the policy will help pay off the deceased’s debt so the co-signer would not be responsible. Gen Xers who are married with children may face a more complex financial situation. When a non-working spouse survives the untimely death of a working spouse, the family’s goals of college for their children and a comfortable retirement become a lot more difficult to achieve. Life insurance provides the money for the family to stay in the home, pay debts, and realize goals. “There are so many sad emotions that come into play when a spouse passes away. The one thing that we don’t want a surviving spouse to have to worry about is the financial burden,” says Cooper.

But what looks like a lot of money to beneficiaries may not be enough to protect a policyholder’s family. Buyers of life insurance should think about how much of their income the insurance money will replace. “If it doesn’t replace a high percentage of it, their family faces the risk of financial disruption or a reduced standard of living,” says Mike Vaughan, associate vice president for Nationwide’s life insurance and annuity business.

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Many who are over the age of 40 find themselves saving for college for

their children but also caring for aging parents. Says Jeff Clemons, general agent at MassMutual Nevada, “The most critical thing a parent of young children can do, long before their kids reach college age and parents become elderly, is to start putting away money for a child’s education.”

In addition to investing through a 529 plan, in which all qualified education expenses remain free from federal income tax and many state taxes, Clemons recommends using permanent life insurance. Its cash value allows for greater flexibility and can be used to cover related college expenses not covered by the 529 plan, such as travel costs, says Clemons. It allows for withdrawals or loans against the policy’s cash value, which can continue to grow tax-deferred. To simply pay for a child’s college expenses in the event of a parent’s death, consider term life insurance.

In dealing with the finances of aging parents, future members of the sandwich generation can eliminate significant stress down the road by reviewing their aging parents’ finances. See if parents have either a life insurance policy that includes a long-term care benefit or a stand-alone long-term care policy that provides nursing home care, home healthcare, personal or adult daycare, and other services for people over age 65 who have a chronic or disabling condition. “A lot of people do not even know how to broach the subject with their parents, so it’s helpful to sit down with a good financial adviser,” Clemons says.

Acceleration of death benefits allows for

the early withdrawal of the death benefit if the insured has a terminal illness or is placed in a nursing home. Though people are generally not aware of these riders, they are fairly standard options. Depending on the sex of the insured, these riders add 10% to 15% to the premium price. Newer benefits add chronic care riders to policies. Says Prudential’s Cooper, “The policyholder may not be terminally ill, but they may have a chronic care need such as Alzheimer’s and require nursing home or in-home care. You can start to use the funds from your life insurance policy to take care of those expenses. That’s a changing option in the industry.”

So regardless of your age or situation, make sure that you have adequate protection. Take Dawn DeLavallade, a recently single, 40-year-old mother of one and a teleradiologist in Winter Garden, Florida. She wrote the book She Makes More—Inside The Minds of Female Breadwinners (Create Space; $18.95). She believes in making sure her family and wealth are protected and has $2 million in life insurance coverage. “My parents always taught me to hope for the best, but prepare for the worst,” she says. “Being prepared helps me rest assured that even in the face of unforeseen circumstances, I will always be protected. What I have is a result of both hard work and blessings. If I allowed an unexpected circumstance to wipe me out, where would my son be?”

We should all share that same vantage point.