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Importance of Insurance in Financial Planning

Insurance, as a product, is beneficial in safeguarding your finances. Here are some reasons which make insurance a quintessential part of your financial portfolio: 

Tax Favorable Aspects

Favorable accessibility options are a key feature that makes life insurance unique from other investment choices.

When a policy is optimized for retirement income, your income stream will come from two sources:

  • Principal: Equal to the total premiums paid.

  • Policy gain: The amount the policy has earned above the premiums paid.

  • Life Insurance has special and significant tax treatments (under IRC Section 7702) that other accounts and product types simply do not have.

  • The cash value grows tax-deferred, and the income stream, when properly designed, can be tax-free under current IRS codes.

Due to the favorable treatment that the IRS gives to life insurance, you can create a tax-free stream of income by first making principal withdrawals. Once the principal has been exhausted, you will shift from withdrawals to policy loans. 

Are There Any Other Considerations?

Permanent insurance used for this purpose should also not be dismissed out of hand because life insurance has unique benefits that other investments and investment wrappers cannot offer. Policies can vary on the details, so please read the illustration, prospectus, and customer materials carefully. Here are some details to consider:


  • The entire death benefit is immediately available when it is placed in force.

  • If managed properly, Life Insurance has unlimited contribution limits, accumulates and grows tax-deferred, can distribute cash to the owner in lump sums or as income streams entirely tax-free, can “advance” certain values in the death benefit tax-free when critical or chronic health issues arise, and endows at the insured's death to the beneficiary on demand and tax-free.

  • The death benefit passes contractually to your named beneficiaries income-tax free. 

  • The policy may offer long-term care benefits or advance payments if you receive a terminal medical diagnosis.

  • Life insurance cash values do not count against student financial aid, government aid and other income-based calculations.

  • Life insurance policy loans are not dependent on your credit score.

  • Straight low cost Equity Index, and Institutionally Managed Blended Indexes, can be utilized to grow the cash accumulation value, providing the opportunity for significant upside return without the downside risk of market declines and losses.

  • Life insurance can be assigned for loans instead of having to place other higher-earning assets with the bank.

  • The stream of income may be adjusted to fit your needs in retirement. For example, you may choose to take income to fill the gap before qualified plan funds are available, then turn it off until you have spent down other assets.

  • If you no longer want the policy, a life settlement company may be able to offer substantially more cash than the remaining cash value of the policy.

  • If you are concerned about outliving your retirement assets, life insurance cash values can be exchanged tax-free for an annuity that will create a guaranteed stream of income for as long as you live.

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