Life insurance: What is it and how it works

Life insurance is often overlooked by high-net-worth individuals (HNWI), who may feel financially secure without it. However, life insurance is a versatile financial tool that offers protection, tax advantages, and wealth accumulation opportunities.

By incorporating life insurance into your comprehensive financial plan, you can help protect your loved ones, safeguard wealth, and achieve long-term financial goals.

The many potential benefits of life, long-term care, or disability insurance are important, and consulting with an insurance professional, including your Private Bank advisor, can help tailor a strategy to meet specific needs and objectives, while helping to reduce risk.

What is life insurance?

Life insurance is a contract between an individual and an insurance company, where the individual pays premiums in exchange for a lump-sum income-tax free payment to beneficiaries upon the death of the insured person’s death. The death benefit helps avoid probate, providing financial security to loved ones, business partners, or other beneficiaries.

The companies selling life insurance vary but do include banks. In fact, Huntington offers life, long-term care, disability, home, auto, umbrella insurance, business, and commercial offerings through Huntington Insurance, Inc.

What are the different types of life insurance policies?

Term life insurance, provides coverage for a specific period (e.g. 10, 20, or 30 years). It offers pure death benefit protection, ideally designed for temporary needs, such as covering mortgage, educational, or business expenses. Once the period expires, the beneficiaries no longer receive a payout.

Permanent life insurance policies offer lifetime coverage, and most include a savings element, which allow the policy to build cash value. Many policies are designed to accumulate cash value over time and can be accessed by the policy holder on a tax preferred basis through loans and withdrawals without immediate tax consequences, following IRS guidelines. Additionally, the death benefit of life insurance is usually paid out income-tax free to beneficiaries.

• Whole life insurance offers level, fixed premiums, and guaranteed cash value growth, with coverage over the life of the insured person as long as premiums are paid.
• Universal life insurance (can be fixed or index based) offers flexible premiums and adjustable death benefits, with cash value accumulation based on interest rates or index values. There are both death-benefit and cash-accumulation focused solutions.

Variable Universal Life, like universal life, offers flexible premiums and death benefits, but policy holders take on more risk by investing the cash value portion in a variety of subaccounts, which may provide the opportunity for greater returns. Both the cash value and subsequent death benefit can vary based on the performance of the underlying investments.

Life insurance considerations

How much life insurance should I have? Determining the appropriate amount of life insurance involves a comprehensive analysis of financial obligations, lifestyle, estate planning goals, and long-term objectives

Below is a list of considerations to help assess life insurance needs:

• What are the current financial assets and liabilities?
• What are the sources of income, and how much of this income would be needed to replace the beneficiaries’ financial support?
• Does the policy holder own a business, and if so, what role do they play?
• Are there dependents who require financial support?
• Have estate taxes and probate costs been considered?
• Are there charitable causes or organizations to support?

Is life insurance taxable? In general, life insurance proceeds paid out to beneficiaries are not subject to federal income tax.

It is essential to consult with a tax advisor and financial planner to provide guidance on structuring life insurance policies to maximize tax efficiency and minimize potential tax liabilities.

Is life insurance considered part of an estate? Life insurance proceeds are typically not considered part of an individual’s estate for probate purposes if properly structured. There are strategies to help life insurance proceeds are distributed efficiently, while minimizing potential estate tax liabilities. A private bank advisor can help determine the most appropriate strategies based on individual circumstances and goals.

Getting the advice you may need

Because your finances and family dynamics are unique, your insurance needs are as well. Huntington Private Bank advisors understand your concern for your family’s welfare and can help tailor a risk management plan that provides financial security and peace of mind for you and your loved ones. To learn more, please contact your Huntington Private Bank team to see how we can help or find a Huntington Private Bank Office near you.