Why insurance should be part of your financial plan

Insurance can play many roles in a person’s financial plan, including investment portfolio diversification, enhanced predictability, tax advantages and risk mitigation. Each helps create a strong financial foundation.

• Insurance can help diversify your investment portfolio. For example, if you’re in a higher income tax bracket and have already maxed out your qualified retirement plan contributions, you can use a cash value life insurance policy to generate tax-deferred growth. When needed, you can draw your basis without paying tax, because you’re simply taking back your own money. And then you can switch to policy loans, which are not reportable income.
• Insurance can add predictability and security to your financial plan. Another benefit of insurance is that it can add some predictability to your legacy and estate plan. Investments, real estate, business interests and other investment assets can vary in value over time. A life insurance policy provides predictability. Life insurance death benefits don’t change drastically over time, so that element of your estate plan will remain consistent.
• Insurance may provide tax benefits. In addition to the tax advantage of growing investments inside a cash value life insurance policy, a well-planned insurance strategy can provide other tax benefits.

In most cases, the death benefit of a life insurance policy is income tax-free for the beneficiary. For high-net-worth individuals whose heirs would face a federal estate tax, or who live in a state that has a state estate tax, placing an insurance policy inside an irrevocable trust can avoid estate taxes.

• Insurance can help mitigate risk in your financial plan. Perhaps the most common reason to own life insurance is to reduce risk. If your family’s primary income provider passes away, life insurance can help fill the resulting financial void.

Some life insurance policies have additional risk mitigation benefits. For example, some can be set up to provide cash for long-term care. Others can provide cash for living expenses while the policy holder is still alive.

Of course, other types of insurance help mitigate risks in other ways. Auto and home insurance mitigate the risk of losing those assets, and disability insurance helps a family when the primary income provider is unable to work because of injury or illness.