Life Insurance: Your Most Overlooked Financial Power Tool

Here’s why it might be a smart wealth strategy you’re not using, and how to find out if it fits your plan.

Why do I need life insurance now?

When most people think about life insurance, they think of death. They think of expenses. And they often shrug it off as something they’ll deal with later.

But what if the right kind of life insurance could do more than protect your loved ones? What if it could also build tax-free retirement income, grow your wealth, and reduce your estate tax burden?

This isn’t just sales talk. It’s a strategy financial professionals use themselves.

In our decades of helping clients navigate complex financial planning decisions, we’ve found that life insurance is often the most misunderstood, yet most powerful, tool in the financial toolbox. The right policy, designed with purpose, can be far more than just a death benefit.

In our free white paper, “How to Use Life Insurance for Your Best Advantage,” we explain how to use this misunderstood asset class for real financial advantage. Here’s a quick preview of what you’ll learn inside.

Why Life Insurance (Still) Matters

We all know life insurance provides peace of mind. But here’s a sobering truth:

The leading financial reason behind poverty among widows and widowers is a lack of life insurance.²

And that’s not just opinion. Economists like Boston University’s Larry Kotlikoff have shown how a lack of life insurance contributes significantly to poverty among widows and widowers.¹ When a breadwinner dies without coverage, income disappears, but bills and responsibilities don’t.

But life insurance isn’t just about solving for loss. It can also be used while you’re living to create a tax-efficient retirement, fund education, or pass on wealth intelligently.

An Insurance That Can Help Build Wealth

There are many kinds of life insurance, but only a few offer long-term financial benefits.

Here’s the short version:

• Term insurance is inexpensive but temporary. It protects, but it doesn’t build.
• Whole life builds some value, but it’s rigid and may underperform.
• Universal life (especially properly structured policies) offers:
  • Tax-free growth
  • Access to funds without taxes
  • A tax-free death benefit
  • Flexible premiums
  • Investment options tailored to your risk tolerance

These are not small benefits (especially in today’s high-tax environment). In fact, permanent life insurance enjoys a unique position in the tax code, allowing for tax-deferred growth and income-tax-free access when properly structured. This position dates back more than a century and remains protected under current IRS guidelines.³

The “Buy Term and Invest the Difference” Strategy: What Is It and Why It’s Not Always the Best Choice

You might have heard the advice to buy inexpensive term life insurance and invest the money you save elsewhere. This strategy sounds straightforward, but it often overlooks important factors like taxes and market ups and downs.

If you can get the same returns inside a permanent life insurance policy (where growth and withdrawals can be tax-free) as you do in taxable investments outside, which do you think leaves you with more money?

Exactly—the tax-free option, assuming the costs are the same between the two.

That’s why properly funded universal life insurance can actually outperform many traditional investments once you factor in taxes and fees. Many wealthy people use it for retirement income, legacy planning, and managing estate taxes efficiently.

What’s Inside the Full Guide?

In our white paper, you’ll learn:

• The difference between term, whole, and universal life insurance, and when each option makes sense
• How cash value works and why it’s a game changer for retirement
• How to structure a policy for maximum living benefits or maximum estate transfer
• Why “minimum death benefit, maximum funding” is a hidden retirement strategy
• How loans and withdrawals from your policy can be tax-free
• How to avoid common pitfalls with policy design

We even explain how to calculate your true life insurance needs and compare death benefit options, all with plain-English examples you can understand.

Is This Strategy Right for You?

There’s no one-size-fits-all financial plan. That’s why this guide isn’t a sales pitch. It’s a tool. We wrote it to help smart people make smarter decisions with real numbers, real examples, and no gimmicks.

Whether you’re nearing retirement, just starting to build your wealth, or trying to protect your estate, life insurance might be the missing piece of your financial strategy.

FAQ

1. What is the difference between term and permanent life insurance?
   Term insurance provides coverage for a specific period and is generally less expensive, but it does not build cash value. Permanent life insurance, such as universal life, offers lifelong coverage and can build cash value that grows tax-deferred.
2. Can life insurance really help with retirement income?
   Yes. Properly funded permanent life insurance policies can provide tax-free income during retirement through withdrawals and loans against the policy’s cash value.
3. How does life insurance reduce estate taxes?
   Life insurance death benefits typically pass to beneficiaries income-tax free and can be structured to help pay estate taxes, preserving more wealth for heirs.
4. What is the “buy term and invest the difference” strategy?
   It’s advice to buy term insurance and invest the money saved elsewhere. While this can work, it may overlook tax advantages and the stability offered by permanent insurance policies.
5. Are the benefits of permanent life insurance guaranteed?
   Benefits depend on policy design and funding. Properly structured policies have tax advantages protected by IRS rules, but it’s important to work with a knowledgeable advisor to maximize benefits.
6. How do I know if life insurance fits into my financial plan?
   Life insurance isn’t one-size-fits-all. Consider your retirement goals, estate planning needs, and tax situation. A financial professional can help determine if it’s the right strategy for you.

Download the Full White Paper:

How to Use Life Insurance for Your Best Advantage (Free PDF)

1. Kotlikoff, Laurence J. & Auerbach, Alan J. Life Insurance Inadequacy — Evidence From a Sample of Older Widows, NBER Working Paper 3765.
2. Bernheim, B. Douglas, Katherine Carman, Jagadeesh Gokhale & Laurence Kotlikoff. The Mismatch Between Life Insurance Holdings and Financial Vulnerabilities, NBER Working Paper 8544.
3. IRS, Publication 525: Taxable and Nontaxable Income, Section on Life Insurance, https://www.irs.gov/publications/p525#en_US_2023_publink1000204912

Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as financial or legal advice. Please consult with a qualified professional for advice regarding your specific situation.

DISCLOSURE: Client stories included in this blog reflect hypothetical client situations that represent those commonly encountered by AIWM representatives.