Key takeaways

  • Like a good financial plan, insurance takes into account your goals and current financial situation and should evolve as your life changes.
  • In addition to income replacement, life insurance, in particular, can help diversify your portfolio, protect late-in-life risks and even has the potential to provide tax benefits.
  • Options for paying your life insurance premiums range from cash to liquidating assets to insurance premium financing.

Insurance isn’t just about planning for life’s worst-case scenarios. Insurance is your financial plan’s safety net – having the right insurance at the right amount protects you and your family from unforeseen events and provides a baseline financial cushion. Insurance can even be used to diversify your portfolio, add some predictability and reduce your tax burden.

“Financial planning in general is not a one-and-done transaction, and insurance shouldn’t be either,” notes Jacob Kujala, wealth management insurance strategist for U.S. Bancorp Investments, an affiliate of U.S. Bank. “A good financial plan takes into consideration your income, investments, goals and concerns, and then is continually monitored. Insurance should follow that plan.”

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

Jacob Kujala, wealth management insurance strategist for U.S. Bancorp Investments

Why insurance should be part of your financial plan

Insurance can play many roles in a person’s financial plan, including investment portfolio diversification, enhanced predictability, tax advantages and risk mitigation. Each helps create a strong financial foundation.

    • Insurance can help diversify your investment portfolio. For example, if you’re in a higher income tax bracket and have already maxed out your qualified retirement plan contributions, you can use a cash value life insurance policy to generate tax-deferred growth. When needed, you can draw your basis without paying tax, because you’re simply taking back your own money. And then you can switch to policy loans, which are not reportable income.
      “It ends up being a de facto tax-free distribution on the back end,” Kujala says. “It helps with income tax reduction and management while it’s growing, and then potentially when you’re taking money out on the back end as well.”


    • Insurance can add predictability and security to your financial plan. Another benefit of insurance is that it can add some predictability to your legacy and estate plan. Investments, real estate, business interests and other investment assets can vary in value over time. A life insurance policy provides predictability. Life insurance death benefits don’t change drastically over time, so that element of your estate plan will remain consistent.


    • Insurance may provide tax benefits. In addition to the tax advantage of growing investments inside a cash value life insurance policy, a well-planned insurance strategy can provide other tax benefits.

      In most cases, the death benefit of a life insurance policy is income tax-free for the beneficiary. For high-net-worth individuals whose heirs would face a federal estate tax, or who live in a state that has a state estate tax, placing an insurance policy inside an irrevocable trust can avoid estate taxes.

      “Doing that creates an asset that becomes income tax-free in terms of the death benefit and becomes state tax-free because it’s owned in an irrevocable trust outside of your taxable estate,” Kujala explains.


  • Insurance can help mitigate risk in your financial plan. Perhaps the most common reason to own life insurance is to reduce risk. If your family’s primary income provider passes away, life insurance can help fill the resulting financial void.

    But life insurance can mitigate risk in other ways. For example, let’s compare the risk related to investing $10,000 per year for 10 years in a traditional investment versus using that amount to “over fund” a $200,000 cash value insurance policy. If you opt for the traditional investment and unexpectedly pass away after only two years, your heirs will receive the value of that $20,000 you invested. If you opt for insurance, however, your heirs would receive the entire $200,000 death benefit.

    Some life insurance policies have additional risk mitigation benefits. For example, some can be set up to provide cash for long-term care. Others can provide cash for living expenses while the policy holder is still alive.

    Kujala stresses that life insurance should not be the only risk mitigation tool an individual has. “Having cash value life insurance is the third leg of the stool,” he says. “It can become very beneficial down the road, but only when it’s used in combination with other investment tools.”

    Of course, other types of insurance help mitigate risks in other ways. Auto and home insurance mitigate the risk of losing those assets, and disability insurance helps a family when the primary income provider is unable to work because of injury or illness.

    “Disability is one of the more overlooked insurances,” Kujala says. “Your average working individual generally relies on their employer-provided disability. But in a lot of instances – especially for highly compensated individuals who get compensation in terms of stock options, etc. – having your own personal coverage to supplement that should be discussed within financial planning.”

    Long-term care insurance also should be part of an individual’s investment plan, Kujala notes, and there are several options in that regard. Traditional long-term care insurance is one option; another is to reposition assets to make them available if needed for long-term care. A third option is, as noted above, to acquire a life insurance policy that provides for accelerated benefits if needed for long-term care.

Options to fund your life insurance 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.

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.

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 and elements should also be assessed, such as optimal ownership and beneficiary structures, exposure to negative tax treatment and the competitiveness of the policies.

As part of your annual financial plan review, a thorough analysis of your existing insurance policies may uncover more attractively priced policies, stronger guarantees and additional policy attributes. Important life changes, such getting married or starting a business, may prompt revisions to your policy as well.

“In addition to making sure you’re getting the right amount of coverage and the most cost effective, it’s also important to review the ownership of the policy and the beneficiary designation for the policies,” Kujala adds.

One insurance plan doesn’t fit all financial plans

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

“Properly structured insurance portfolios are unique and should be individualized to your situation,” says Kujala. “Your estate plan, your legacy and your wishes after you’re gone must be taken into consideration.”