Everyone knows what a life insurance policy is - it's an insurance contract in which an insurance company promises to pay out a monetary benefit to policy beneficiaries after the insured passes away, as long as premium payments are paid consistently and no misrepresentations are made on the application. Based on that definition, you can tell that life insurance is a pretty straight-forward policy, but that doesn't mean it can't be used as a sophisticated financial planning instrument.

There may be some things that you don't know about life insurance that could help to fortify your financial plan against certain risks and give you access to additional cash when you need it. (There are many benefits to owning a life insurance policy - if you get the right one for you. See Life Insurance: How To Get the Most Out Of Your Policy.)

TUTORIAL: Introduction To Insurance

Cash Value Loans
If you need money for almost anything - paying taxes, supplementing retirement or college savings, funding a medical treatment or paying for a dream vacation, you can take a loan out of your life insurance policy's cash values in order to satisfy that need. Cash value loans are tax-free, since they aren't considered gains but loans that you need to pay back, and interest is paid back to your policy rather than a lender. Just remember that if you don't pay back the loans before the death benefit is paid out, it will reduce the proceeds that your heirs receive.

Accelerated Benefit Rider
If you should be diagnosed with a terminal illness, you can access a percentage of the death benefits of your policy before you pass away if you have the Accelerated Benefit (sometimes called the Terminal Illness) rider. This can help defray some medical expenses and living expenses when you are no longer able to work, and can help you and your family stay comfortable financially during this difficult time. It is important to note that using this rider will greatly decrease the death benefit your heirs receive since it is accelerating a portion of the benefit to be received prior to the insured's death.

Decreasing Premiums/ Death Benefits
Term insurance policies offer a death benefit for a limited period of time. They are often used to cover temporary, large debts like mortgages because the term of the policy's benefit can be chosen for the number of years that the debt will be outstanding. But term policies are even more flexible than that. You can design yours so that the death benefit decreases over the years, much as your mortgage balance will, or you can design it to have decreasing premiums.

Variable Subaccounts
When you invest in a variable life insurance policy, there are subaccounts that you can pick from to invest your cash values in. These subaccounts are created from underlying investments like stocks, bonds and money markets. They can vary in risk, volatility, and growth depending on how the underlying assets perform. If you become unhappy with the performance of one of your subaccounts and you wish to make adjustments, you can. Additionally, you can allocate a percentage of your cash values to multiple subaccounts.

Probate-free Death Benefit
Unless your assets are in a trust, your estate will need to go through probate after your death. Even if you have a will and no one who can contest it, your heirs will be forced to wait until after probate to receive your estate. Life insurance proceeds, however, do not need to go through probate unless the estate is named as the beneficiary. (These considerations will help you make a realistic and thorough retirement plan. Check out 5 Steps To A Retirement Plan.)

The Bottom Line
Your life insurance policy can be as simple as you want it to be, or it can be a complex product designed to complement your overall financial plan and hedge against losses, terminal illness expenses and probate. It's up to you to design a policy that works the way you need it to, either as a simple death benefit or a sophisticated planning tool.

Related Articles
  1. Retirement

    The Cities Where the Ultra-Rich Retire in Florida

    Understand why the Florida communities of Miami Beach, Palm Beach and Key West serve as magnets for the ultra-rich retirees who descend on the state.
  2. Retirement

    The Better Way to Save: Life Insurance or IRA?

    Sure, you can tap your permanent life insurance policy to help fund your retirement. But in most cases, an IRA is the better choice. Here's why.
  3. Retirement

    The 5 Best Retirement Communities in Austin, Texas

    Discover five of the most desirable retirement communities for seniors located in the Austin/Georgetown metropolitan area in Texas.
  4. Insurance

    Life vs. Health Insurance: Choosing What to Buy

    When you only buy the coverage you truly need, the debate over medical insurance vs. life insurance might just be one you can avoid.
  5. Retirement

    4 Reasons Why Americans Retire in the Dominican Republic

    Understand why many Americans are deciding to retire internationally. Learn about the top four reasons why Americans are retiring to the Dominican Republic.
  6. Insurance

    The 5 Biggest Russian Insurance Companies

    Discover the five companies that dominate the Russian insurance market, and learn a little more about their business operations and ownership.
  7. Retirement

    You Would Be Crazy to Retire in These 3 States

    Learn the common criteria for choosing a retirement destination, and understand why you would be crazy to retire in Oregon, Missouri or Alaska.
  8. Insurance

    Life Insurance & Annuities: Sound Investments?

    There are certain scenarios in which investing in insurance is a savvy move. But expect a big chunk of your money to go toward fees.
  9. Retirement

    The 5 Best Retirement Communities in Charleston, South Carolina

    Learn about five of the most desirable retirement communities for seniors that are located in and around Charleston, South Carolina.
  10. Insurance

    Biggest Life Insurance Companies in the US

    Read about the top life insurance companies in the United States as measured by written premiums and learn a little more about their business operations.
  1. Can I borrow from my annuity to put a down payment on a house?

    You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>
  2. What are the biggest disadvantages of annuities?

    Annuities can sound enticing when pitched by a salesperson who, not coincidentally, makes huge commissions selling them. ... Read Full Answer >>
  3. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  4. How can I determine if a longevity annuity is right for me?

    A longevity annuity may be right for an individual if, based on his current health and a family history of longevity, he ... Read Full Answer >>
  5. Can your life insurance company sue you?

    A life insurance company generally cannot sue you, but it can sue your estate. The company may do this in order to recover ... Read Full Answer >>
  6. Can your insurance company cancel your policy without notice?

    In most states, an insurance company must give a policyholder written notice of at least 30 days before canceling a policy. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!