4 Ways to Make The Best Use of Your Tax Refund

Technology provides ample flexibility when it comes to making purchasing decisions these days. You are no longer required to go somewhere, talk to anyone, or spend a great deal of time comparing options. The internet is a convenient place that is accessible wherever you are, doesn’t require you to talk through your purchase with a sales representative, and allows you to spend as much or as little time researching your decision as you’d like. This can make life more efficient and simpler, but when it comes to important decisions like purchasing life insurance, you run the risk of simplifying the decision too much, not fully understanding what you’re purchasing, and purchasing a policy that may not provide the most flexibility and options later in life when you need it most.

There is no shortage of information available about life insurance on the internet. A lot of it has negative connotations. From policies that historically haven’t provided what was promised, to salespeople coaxing consumers into products, and one size fits all advice. Most people come in with the base knowledge that they need term insurance if they have a spouse and children they want to protect financially if they pass away. Combine these two factors and people generally use the internet to find an inexpensive policy. However, when making a decision about life insurance there are a few important factors to consider besides simply the cost and the amount of insurance, namely living benefits or accelerated benefit riders, and whether the policy has a cash-value component.

While all policies are required to have a terminal illness rider, meaning the insured has the option of utilizing the death benefit prior to passing away if diagnosed with a terminal illness, not all policies come with a chronic or critical rider. A chronic illness rider can accelerate your death benefit if the insured is diagnosed with an illness and unable to perform two of the six daily activities of living (bathing, continence, dressing, eating, toileting, and transferring). Considering how expensive long-term care insurance can be these days, having a chronic illness rider on a life insurance policy can provide some level of affordable protection (depending on your age when you get the policy). The critical rider can apply to injuries or illness and can include things like heart attack, stroke, paralysis, severe brain trauma, and diagnosis of invasive cancer. Having these riders in addition to one that protects against terminal illness adds a much more encompassing level of protection to the insured that can provide flexibility and options in an unplanned emergency.

Life insurance can also have a cash-value component or investment vehicle in addition to providing protection. Cash-value in a permanent life insurance vehicle is one of the only ways to build non-taxable income in retirement besides a Roth IRA. Other than the tax benefits, it can also enhance your plan with diversification and stability. It generally has some level of protection, called a “floor” that assets invested in the stock market wouldn’t have, meaning there is protection against the downside while allowing the investor to take advantage of positive markets.

Whether or not you choose a policy that has all of these components, it is important to consider which benefits are meaningful to you and are worth paying for. It can be hard to determine the pros and cons without talking to a licensed professional that has your best interest in mind and it can be difficult to really understand what you’re purchasing just by browsing the internet for the least expensive policy. Just like any insurance, the ideal situation is not needing it. But if you do, you’ll be happy you did your research and understand the vehicle you chose.

This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. This article is intended to assist in educating you about insurance generally and not to provide personal service. Guarantees are based on the claims-paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges, and restrictions, and the policyholder should review their contract carefully before purchasing.

If you decide to downsize after retirement and have lived in your home for at least two years out of the last five from the date of sale, you can exclude up to $250,000 in capital gains from the proceeds and almost double that if you are married.

Let’s talk about employer loyalty. For much of the 20th century, Americans (by and large) followed a standard script: enter the workforce and work for a single company for decades, then throw a retirement party at 65 and cash in a pension – a reward for years of company loyalty. This pension provided retirement income; usually, a percentage of the yearly salary the employee earned while working. American Express established the first corporate pension plan in the US in 1875. By 1960, about half of the private sector employees had a pension. Of course, in 1960 the average life expectancy was 67, meaning that if you retired at 65 (standard at the time), the average pension only had to provide income for two years.

Since 1960 there have been many advances in modern medicine raising average life expectancy to 79. Suddenly, plans designed to cover a few years of post-retirement income were expected to cover retirees well into their 80s and 90s. Companies offering pensions began to realize that their retirement plans were becoming increasingly – sometimes prohibitively – expensive to fund. As pension expenses continued to rise towards the end of the 20th century, many companies were forced to design new systems to ensure their employees were financially secure come retirement.

The 401(k) plan hit the streets in 1980. The employer-sponsored retirement plan was rolled out as a replacement to traditional pensions and has since become the most common retirement savings mechanism in America. In essence, the 401(k) provides a tax-deferred way for employees to set aside wages for retirement. Employees elect to divert a certain percentage of their income each year to a 401(k) account. The diverted funds grow tax-free in that account until the employee retires.

In addition to providing the account, most companies offer a savings-match system. For instance, in a 3% match system, the company would match up to 3% of an employee’s elective contributions to their 401(k) account. The employer match provides a strong incentive for employees to start planning for retirement. If an employee doesn’t divert AT LEAST the match threshold into a 401(k) they miss out on the employer match – in other words, they lose out on free money from their employer.

Let’s talk about the benefits. Funds in a 401(k) account are able to grow tax-free. Because growth is not disturbed by capital gains taxes, accounts are able to grow faster than a standard individual account. Of course, there’s always a catch: money in employer-sponsored plans – like a 401(k) – cannot be withdrawn prior to age 59 ½ without paying penalties. Most plans offer options for the participants to increase their contribution rate on an annual basis, and small increases in contribution rate (even as small as 1%) year over year can make a huge difference by the time you retire.

Contributing to employer-sponsored retirement plans such as a 401(k) or 403(b) – the non-profit version of a 401(k) – is a vital part of preparing for retirement. The money is automatically deducted before your paycheck is cut, making it easy to budget and painlessly save for retirement at the same time.

Contributing to employer-sponsored retirement plans is an essential step towards retirement planning – but it is only the first step.

Please contact me at zach.swaffer@trilogyfs.com if you are interested in discussing the next steps you can take to ensure retirement security.