If you are injured and go to your physical therapist for a recovery regimen, you don’t start with the activity that led to the injury; instead, you adopt a conservative program to aid in a gradual but successful recovery. The obvious way to recover from an injury is to begin a measured process that rebuilds the injured area while avoiding the risk of re-injury.
Life insurance to the rescue
In the past year, many of our clients have experienced financial injuries. The troubled economic environment may have caused their financial well-being to suffer debilitating damage. As they start to move toward the recovery phase of their financial planning, life insurance stands out as a key element in their financial rehabilitation.
This product has the features and benefits that can help a financially harmed client rebuild his wealth and protect against further losses. It offers a conservative approach that supports the client’s concerns during these troubled times and provides protection in case of unexpected events that may cause further financial injury. It also has advantages that hasten financial recovery.
Just as overly aggressive activities can lead to physical injuries, many clients can and have suffered financial losses because of aggressive misuse of money. They spent too much, borrowed too much and invested too radically. Now, as they look at recovering from their losses, they are gun-shy about getting back into the game. Life insurance offers them a conservative known product that can help them re-enter the financial world. It can provide baseline guarantees and a conservative approach to rebuilding lost wealth. Through the payment of ongoing premiums, the client begins the gradual process of financial rehabilitation in a way that can offer reassurance.
Life insurance offers financial protection in case there is another shock to a family’s well-being. Death and disability can destroy finances as quickly or more quickly than a severe recession. Many clients intend to recover lost wealth through continued employment. This, however, may require many years of working and saving. Life insurance with a waiver of premium provision provides a strategy for a financial re-injury caused by a death or disability. As a consequence of the economic meltdown, consumers now understand that their finances can suffer unforeseen injuries. More and more are realizing protection is needed as a hedge against financial losses.
Recovering from a physical injury can be expensive, as can recovering from a recession. In both cases, income taxes can be a source of the expense. Because of the social benefit of seeking appropriate medical care, there are many tax provisions that seek to lower the tax costs associated with medical care. Examples include the tax-free nature of medical insurance and voluntary programs, such as flexible spending account plans.
Taxes can be harmful in recovering from financial trauma as well. If it will take a consumer 10 years to recover from a 50 percent market loss before tax, it will take an additional four years to recover if the consumer is in the 30 percent income tax bracket. Life insurance can help alleviate some of the financial harm caused by income taxes.
When properly managed, life insurance offers tax deferred growth and the potential for tax-free withdrawals. (Withdrawals and loans may decrease the amount of death benefit and cash-accumulation value of life insurance policies.) The less the tax cost; the quicker the recovery.
In this period of economic recovery, life insurance is getting a second look from consumers and their advisors. Rather than representing the miracle cure for the financially damaged client, life insurance is a conservative, self-completing asset that represents prudence and wisdom in financial management. As an asset class, it offers a death benefit that is not correlated to the vagaries of the marketplace. The benefit has potential for a positive internal rate of return. Life insurance is a prescription for the client who is ready to recover from the recession.
Steve Parrish, JD*, CLU, ChFC, RHU, is a national advanced solutions consultant with The Principal Financial Group. He can be reached at 515-235-6120.
(While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that neither the author nor The Principal are rendering legal, accounting or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. Clients should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax or accounting obligations and requirements.)
* JD is an educational degree and the holder does not provide legal services on behalf of the companies of The Principal Financial Group.