If you’re one of the lucky few earning a high income, you may think you’ve got it made. Well, if we’re being honest, you definitely deserve some of the envy directed your way, but the key is to keep it that way.
High earnings in the present do not guarantee wealth after you hang up your boots, which is where life insurance and retirement planning come in.
Are Income and Wealth Different?
Wealth and income are closely related, but not the same. Income is the money you receive on a regular (or irregular) basis, while wealth is the money that you have in savings and assets. This is why being a high-income earner isn’t quite the same as being a wealthy person, and why you need smart financial strategies to grow your wealth.
How Does Life Insurance Enter the Picture?
A life insurance policy is more than just a safety net for your loved ones and dependents. It’s a powerful wealth generation tool, which offers benefits during your lifetime and after.
Here are 6 ways to use your life insurance policy to protect your wealth, boost your savings and build a comfortable retirement nest egg:
Risk Coverage and Management
You may receive a high income from a well-paying job, rental properties, your own business, or even a combination of multiple sources. What’s all your income sources share is risk, and the effect of losing one or more of them could leave you in dire straits.
Life insurance can help you protect these assets against loss (and yes, your job counts as an asset too), thus minimizing risk to your wealth.
Funding Insurance with Annuity/IRA Income
A 1035 exchange turns a deferred annuity into an SPIA (single premium immediate annuity) that offers a single life payout, which can be used to buy life insurance.
With an IRA rollover account, use the first distribution after retirement to buy insurance on your spouse, leaving the rest to grow tax-deferred. Using a deferred income annuity or a rollover IRA to buy a life insurance policy allows you to leave more money to heirs than either of the original accounts.
Business Funding with Life Insurance
Instead of dipping into your savings or taking a loan to finance your business, use the accumulated cash value of a permanent life insurance policy. This can be withdrawn or borrowed against, offering you a ready and risk-free source of funds.
All this, in addition to tax benefits as well as the protection already in place for you as the owner or key employees in your company.
Lower the Future Tax Burden Now
One of the biggest concerns for wealthy individuals is the ‘tax time bomb’ that could explode when their estate is distributed. It’s especially worrisome if you own a deferred annuity, which doesn’t offer the same tax benefits as stocks or bonds outside of it.
If you’ve owned an annuity for years and want to leave tax-free money to your heirs, then cash it in, pay off the taxes and use the remaining funds to buy life insurance. Consider putting the insurance plan into a trust, too.
Transferring Business Ownership
The business you’ve worked so hard to build deserves to be protected and passed on as carefully as other assets in case you die. Life insurance can be used for business succession planning, so that your family receives a lump sum payment in exchange for its ownership, which can be passed to another family member or an outside party as per your plans.
Leaving a Philanthropic Legacy
Giving to a favorite organization or charity feels good, but what do you do if you aren’t wealthy (but still want to help)? Give them your life insurance proceeds. When you make an organization the beneficiary of your policy, it will receive a substantial donation after your death.
Over the years, you will constantly find new ways to build your wealth, but investing in life insurance is the first step toward protecting what you already have. If you understand and evaluate possible risks, making smart financial decisions will soon become a habit!