Why insurance should be part of your financial plan

Financial Planning

Insurance isn’t just about planning for life’s worst-case scenarios. It can and should play an active role in your overall financial and wealth transfer planning strategies.

There are a variety of ways insurance — be it life, long-term care or disability plans — can protect or even contribute to your wealth in a tax-efficient way.

  • Life insurance can protect or augment your legacy.
  • Long-term care insurance can provide income tax-free cash flow to fund long-term care.
  • Disability insurance can replace earned income lost to disability.

One insurance plan doesn’t fit all

There are as many types of insurance plans as there are clients, and purchasing insurance should be considered a planning, not transactional, perspective.

“Your insurance policies are unique and very individualized to your situation,” says Taylor Miller, senior vice president and national director of insurance premium financing at U.S. Bank Wealth Management. “Your estate plan, your legacy and your wishes after you’re gone must be taken into consideration.”

The most common need for life insurance is providing cash when your estate is being settled, but the possibilities start there.

  • Need to plan for the succession of your business? Life insurance can provide your family or business partners with funds to help assure an effective succession of ownership among family members or transfers between partners.
  • Need additional retirement income? Life insurance can be a useful tool to pool wealth with unique tax advantages for later in life.
  • Want to include charitable giving as part of your legacy? Life insurance can help you and your family pass on wealth to causes that you’ve selected.

Options to fund your premiums

Not only are insurance plans customizable, but how you choose to pay your premiums — the amount you pay for a given policy — can also be tailored.

“Your premiums can come from a variety of sources,” says Pat Edwards, a regional insurance specialist with U.S. Bancorp Investments. “I often joke that it’s not that people hate insurance, it’s that they don’t want to pay for it. So, it’s a matter of finding the dollars that are the least painful to fund the premiums.”

The funding source may simply be cash. You may also free up cash by reducing holdings, or you may generate cash by selling existing stock portfolio positions. There can also be income available through assets gifted to family members, such as investment real estate. Liquidating assets is another option, though that may have tax implications.

Financing your premiums is another route if you’d like to avoid losing assets to pay large premiums. As an example, life insurance premium financing can be a good option for a family with accumulated assets that would be subject to a large estate tax once they’re passed along to their heirs. These assets could include investments, privately-held businesses, or real estate.

“Your insurance policies are unique and very individualized to your situation. Your estate plan, legacy and wishes after you’re gone must be taken into consideration.”

“The family might need a large life insurance policy to pay for the estate tax coming their way,” Miller says. “Finding the necessary funds needed to pay high premiums can be a challenge. Financing can help by using a loan to cover the required premiums. Life insurance premium isn’t for everyone, but, within the right set of circumstances, it’s a fantastic tool to help the borrower maintain the assets they spent a lifetime accumulating.”

Review your insurance policies regularly

As time goes on, the performance of your insurance policies will often fluctuate, such as with interest rates. Other factors such as optimal ownership and beneficiary structures, exposure to negative tax treatment, the competitiveness of the policies, and other elements should be assessed.

As part of your annual financial plan review, a thorough analysis of your existing insurance policies may uncover potentially more attractively priced policies, stronger guarantees, and additional policy attributes. Ultimately, staying on top of your insurance policies is important because of their value. “Insurance contracts are many times a client’s largest unmanaged asset and pivotal to achieving planning outcomes,” Edwards says.


Learn more about how insurance fits into your financial plan.