Investors don’t usually think of insurance as part of their investment strategy, but they should.
An individual’s insurance needs change during their lifetime. Insurance products over the past decade have become increasingly innovative in the number of ways these needs can be accommodated. Specialized health care and illness insurance as well as wealth and estate planning insurance options enable investors to protect themselves during their lifetime. They additionally offer legitimate ways to maximize retirement savings and minimize estate tax liability.
Insurance becomes part of an investment strategy when it protects you against loss of health or income, and protects your ability to save and invest for the future. From an investor’s perspective, the type of insurance you buy can be determined by asking the same basic questions you’d need to ask regarding any investment decision: Will it have real value when I need it? Do I understand what I’m buying? And what is my “return on investment”?
Life insurance — term, whole and universal — needs to be matched to the timing of the risk. Term insurance is short-term coverage for income replacement or asset protection. Its value will be found in how well it can retire mortgage and other debts and become a source of income for the beneficiaries of the policy. The term of the insurance policy is fixed and it is renewable, but the cost becomes progressively more expensive. Older investors who have wealth that has increased along with their age may want to convert to a whole or universal life insurance policy with a death benefit value based on the estimated taxable assets of the estate. In this way, the policy’s beneficiaries can settle outstanding debts and taxes of your estate and avoid the hasty or unwanted disposition of assets.
Investors can also use a life insurance policy for supplemental retirement income, using the policy’s cash value as collateral for a series of tax-free loans during retirement. Upon death, the policy death benefit pays back the loan.
This look at using insurance as part of an investment strategy will be continued in my next column in two weeks.
Judy Poole is a financial advisor with Raymond James, and has spent the last 39 years involved in the financial industry. You can reach her at email@example.com. This article is provided as a general source of information and should not be considered personal investment advice. The views expressed are those of the author and not necessarily those of Raymond James Ltd.