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Many individuals acquire life insurance for their family’s financial security after suffering from an unfortunate life event like the insured individual’s death. Moreover, life insurance can also be used to pay off debts like a car loan or credit card bills.
Life expectancy is going shorter over time, so investing in life insurance is more important than ever. Getting permanent life insurance could benefit young individuals starting to build wealth, especially entrepreneurs. Learn more about what’s in permanent life insurance and why you should invest in one.
Tax Benefits and Financial Flexibility
You can also make the most of your permanent life insurance through the unique tax benefits it offers. This tax benefit applies to the cash value even if you are still alive. Young entrepreneurs can use permanent life insurance as a tax-free investment vehicle. The distributions can even be taken tax-free with careful planning.
Suppose you’re a contractor, freelancer, or self-employed entrepreneur. In that case, you can use your permanent life insurance to offset taxes on Medicare and Social Security, as no employer covers a portion of these expenses.
With permanent life insurance, you can benefit from tax-free policy loans, retirement income, and cash value growth. You can also avail tax advantages of the policy’s death benefit. However, you should be careful with paying premiums in too short a period because your life insurance might be labeled as MEC (modified endowment contract).
When tagged as MECs insurance, you will lose the tax benefits and pass up the chance of growing your cash value tax-free.
Building Cash Value and Investment Opportunities
Managing a business can sometimes get rough. You will be prone to income stability caused by the uncertainty of your business ventures. With permanent life insurance, you can mitigate financial risks and stay afloat during bad times. You can use the insurance to cover expenses, supplement cash flow, and pay off your debts.
If your insurance has a cash value component, you can use it to initiate tax-free business growth, even when you’re still alive. Additionally, in partnerships, there will be an agreement that when a partner dies, the other partners can buy their share in the business. With permanent life insurance, you can fund this buyout.
The buyout is only possible when the family members of the deceased partner are not interested in taking part in the business or if the partners don’t want any outsiders in the business.
Estate Planning and Business Succession
Life insurance can also ensure that all of your beneficiaries get an equal inheritance of the family business. This is called estate equalization, which involves passing on your business to one family member and dedicating something to the other beneficiaries.
For instance, if you have two children and only one is taking part in the business. You can entrust the corporation’s share to your successor and name the other child as a “beneficiary,” handing down the insurance payout to him or her.
If you have more children, you can buy an additional insurance policy worth your business, ensuring a doubled or tripled value when passed down to the next generation.
Access to Capital and Business Expansion
Life insurance earns cash value. This is why you can earn dividends based on profits earned annually. The dividends may vary yearly, but you will undoubtedly receive payouts even in difficult times like the pandemic and recession.
With the cash value, you can use a policy loan to fund your business and cover other business costs like expansion. The capital will be funneled back to the insurance company so you can use it again the next time you need it for your business. With this, you can avoid paying high-interest rates at financial institutions like banks. Life insurance is an ideal place to source business capital, so young entrepreneurs should leverage them.
Retirement Planning and Wealth Preservation
Besides typical retirement savings like retirement funds and mutual bonds, permanent life insurance can also be a viable retirement option for young entrepreneurs. As the cash value grows at a guaranteed rate, you can borrow or withdraw it for later use, like retirement.
Entrepreneurs should consider getting permanent life insurance while young since the premiums will likely be lower and will likely stay the same as they pay for it in the coming years. The retirement savings that permanent life insurance can supplement are IRA (Individual Retirement Account) or 401K plans.
Employee Retention
Young entrepreneurs can offer life insurance for their employees. With this approach, you can avail of tax benefits while retaining good employees with this “benefit.” If a key employee dies, the business can have an “insurable interest.” If the insured employee resigns, you can transfer ownership of the insurance to the new employee and have that employee reassign the beneficiary, like a family member or their estate.
Final Thoughts
Young entrepreneurs can avoid high-interest loans from traditional banks and other financial institutions by investing in permanent life insurance. More than this, they can attract more employees, fund their capital, and enjoy tax benefits. No matter the size of your business, secure permanent life insurance while you’re young so you can enjoy an exponential rate of profit out of this investment in the long run!
