Income replacement is a simple concept to understand. Through the miracle of life insurance a beneficiary invests the death benefit of the policy and lives off the investment returns rather than spending down the death benefit or principal. In those years where the investments earn more than what is needed,
the excess is reinvested back into the principal. This strategy helps in those years when investment returns provide less than what is needed and the beneficiary must tap into the principal to make up the any shortage from investment returns.
Here’s How it Works
Let’s assume Officer Mike wishes to replace his annual salary of $65,000 for his loved ones upon his death.
Officer Mike goes online and purchases a Low-Cost, 30-year Level Premium Term policy with a $650,000 death benefit through Law Enforcement Life.
Upon Mike’s death his loved ones receive a lump-sum, tax-free death benefit of $650,000.
The beneficiary then invests the proceeds in a well balanced choice of high quality investments.
Assuming the investments earned a 10% rate of return before taxes year-after-year, the return would be $65,000 which is equal to the income Officer Mike wanted to replace for his family.
Now obviously rates of return fluctuate often so assuming a fixed rate of return is not realistic. Some years the account will exceed 10% while other years will have results less than 10%. The objective is to
reinvest the
excess income earned in years where a greater than 10% rate of return is achieved.