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Smart Women, Smart Money (5/11/17 Issue)

Life insurance can help provide financial security in many ways, but consider the benefits first. – Courtesy photo


Dear Emmy, My mother is almost 70 and she’s being encouraged to buy life insurance. Is this common and should I be concerned?

By Emmy Hernandez

Life insurance is generally cost prohibitive for people over 65, so this possible purchase by someone your mother’s age is not very common. Life insurance typically provides protection for families in the event of an untimely death. Through this lens, a policy doesn’t appear warranted.

Keep in mind, insurance vehicles can be part of a well-constructed financial plan. A properly chosen policy may also serve estate and tax planning purposes. Don’t jump to any conclusions without speaking to your mother first. She may know exactly what she’s doing.

As in intergenerational wealth transfer tool, some life insurance products work quite well. For a person your mother’s age, who may have cash on hand or sitting in low earning CDs, acquiring a policy that insures a younger loved-one may do good. For example, using her own money to purchase a policy in her child’s name, or someone of that generation, for the benefit of her grandchild, or again someone of that generation, can be a smart strategy that helps propel a future generation.

If the insured person passes unexpectedly, then the beneficiary can receive the death benefit funds quickly and tax free. Hopefully, the insured will live a long and fruitful life. In this case, the policy’s cash value might be withdrawn as a tax-free loan. In many circumstances, such loans do not need to be repaid, but a reduced death benefit can be a consequence.

Perhaps your mother is using an insurance policy as an alternative to a 529 college savings account. With 529 plans, the named beneficiary may use the funds tax free for a host of IRS-approved, education-related expenditures, provided that receipts and other documentation are kept. But if the beneficiary wants to use these funds for non-educational activities, then the tax benefit can be lost.  

This is not the case for money accessed from an insurance policy. These funds may be used for any activity that the family deems appropriate. Aside from paying for college, buying a first car, travelling abroad or starting a small business, are now potential options.  

If you find that your mother’s rationale is reasonable, then ensure that she compares policies and companies. Life insurance can help provide financial security in many ways. If your mother is considering this for any reason other than her own death benefit, make sure that the chosen policy is suitable to fill this alternative role. Have an open conversation with your mother to determine the details and don’t hesitate to seek a second opinion.

The opinions voiced are for general information. They’re not intended to provide specific advise or recommendations to anyone and don’t constitute and endorsement by NPC. Securities and Advisory Services offered through National Planning Corp. (NPC), member FINRA/SIPC, a Registered Investment Advisor. EH Financial Group, Inc. and NPC are separate and unrelated companies.  NPC doesn’t give tax advice.

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