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Life insurance as a wealth building strategy

Life insurance is more than just a strategy to provide for your kids should something happen to you; it's also a wealth accumulation tool. Generally, you should first consider life insurance if you have dependents who would suffer financially should something happen to you. Having said that, life insurance can provide tax-free accumulation of assets for the purpose of retirement income or fund an expense further down the road.

There are two types of life insurances. Term, or temporary, life insurance only lasts for a fixed number of years, say 10 or 20. Premium remains fixed, is determined when you apply for this insurance, and is based on your age and health status. The other type of insurance is permanent, or cash value life insurance, and is far more complex. Premiums are not fixed and increases as you age, however, you have flexibility to save money within the policy, which can be invested and used for an expense later in life.

If you have positive cash flow and are in generally a high tax rate, permanent life insurance might be something to consider. Part of your premium payments will also go to a cash bucket. The money accumulated there can be invested and would grow tax-deferred until you pull it out or cancel the policy. Permanent life insurance allows for the tax-deferred growth of your investments and when it grows to a significant amount, it may pay policy premiums later so that you don't have to. You can also pull the money out tax-free via the loan provision for the purpose a funding an expense, say college tuition or a new car. If you do take cash out of the policy be careful to make sure that the health of the policy remains in good condition and that it's not at risk of lapse because of lack of funds. It’s prudent to work with a professional to make sure the policy design is accurate from the get-go.

Life insurance can also be used as an estate planning tool. If you have an IRA or 401K money, this will be taxable to your beneficiaries as ordinary income whereas life insurance benefits are not. As you prepare your estate plan, using life insurance as a replacement tool for your retirement accounts would provide more for your beneficiaries and less to taxes. It also provides more flexibility if you want the benefits delivered to your beneficiaries in a specific way, say in the form of a monthly distributions for life or lump sum amount.

At Eureka Wealth Management, I help my clients with the design of their permanent life insurance. Whether it's used for financing college or protecting your dependants, there are many strategies to consider and I help break down your options. Annually, I review your policies and tweak them as needed, depending on investment performance within the policy or if your goals have changed. I also provide investment management and retirement income strategies. Call me at (760) 537-0791 or online at

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