Maximizing Your Tax Refund: Investing in Life Insurance

When tax season rolls around, many of us eagerly anticipate the possibility of a tax refund. This annual windfall can be a great opportunity to make a significant financial decision, such as purchasing life insurance. At O1ne Mortgage, we believe in helping you make the most of your financial resources. In this blog, we’ll explore the pros and cons of using your tax refund to buy life insurance, and provide tips on how to save on premiums. If you have any mortgage service needs, don’t hesitate to call us at 213-732-3074.

Pros of Using Your Tax Refund to Buy Life Insurance

Pay Your Annual Premium With One Payment

One of the primary benefits of using your tax refund to purchase life insurance is the ability to pay your annual premium in one lump sum. According to Policygenius, the average cost of a 20-year term life insurance policy for a 30-year-old policyholder is about $30 per month, or $360 per year. By paying for a year’s worth of coverage upfront, you may qualify for pay-in-full discounts, ultimately saving you money in the long run.

Reduce Your Monthly Expenses

Paying your life insurance premium in full can also reduce your monthly expenses. This eliminates the need to make monthly payments, decreasing the risk of missing a payment and jeopardizing your policy. Additionally, freeing up money in your budget allows you to allocate funds toward other financial goals, such as building an emergency fund or paying down debt.

Use Your Tax Refund for Something Worthwhile

Using your tax refund to purchase life insurance is a wise financial decision. A strong policy provides peace of mind, ensuring that your loved ones are taken care of if something were to happen to you. There are two main types of life insurance policies to consider:

• Term life: Lasts for a predetermined amount of time and provides a death benefit if you pass away during that period.
• Permanent life: Typically lasts a lifetime (as long as you pay the premiums) and accumulates a cash value that grows tax-free over time. Permanent life insurance is more expensive than term life insurance.

Strengthen Your Retirement Nest Egg

The cash value that builds in a permanent life insurance policy earns interest and can provide income on an as-needed basis. This can be particularly reassuring during retirement when you are no longer working. The cash value can be used to cover regular expenses or help you through a financial emergency. You can borrow against your cash value and pay it back, or choose not to repay the funds, though this will reduce your policy’s death benefit.

Cons of Using Your Tax Refund to Buy Life Insurance

Tax Refunds Aren’t Guaranteed

One downside to relying on your tax refund to pay for life insurance is that tax refunds are not guaranteed. Your tax refund depends on various factors, including your tax withholding and eligibility for deductions and credits. If your tax refund decreases or you owe money to the IRS in the future, you may struggle to continue paying for your life insurance policy, risking cancellation.

It May Not Be Enough to Cover All Your Premiums

The average tax refund for the 2022 tax year was $2,753, according to IRS data. However, individual tax refunds vary, and your refund may not be sufficient to cover your life insurance premium. If your refund falls short, you’ll need to ensure there’s room in your budget to cover the difference, avoiding financial strain and potential debt accumulation.

Your Money May Be Better Spent Elsewhere

Depending on your financial situation, your tax refund might be better spent on other priorities. Consider using your refund to:

• Pay down debt
• Build your emergency savings
• Buy a home
• Save for retirement
• Invest
• Start a business

Another option is to split your tax refund between multiple goals, which may or may not include buying life insurance.

How to Save on Life Insurance Premiums

Finding adequate life insurance coverage without breaking the bank is possible. Here are some tips to help you save on premiums:

Adjust Your Coverage

One rule of thumb is to choose a death benefit that’s equal to 20 or 30 times your annual salary. However, depending on your needs, you might feel comfortable trimming your coverage to save on premiums.

Opt for Term Life Insurance Over Permanent

If you’re relatively young and healthy, a term life insurance policy could cost much less than a permanent policy. While a term policy won’t accumulate a cash value, it will still provide coverage if the unthinkable happens.

Shop Around

Every life insurance carrier and policy are different. Comparing plans and coverage options can help you find a lower premium. You can shop around on your own or work with an insurance broker to find the best deal.

Buy Life Insurance When You’re Younger

Life insurance tends to get more expensive as you age. By purchasing a term policy sooner rather than later, you can lock in an affordable premium.

The Bottom Line

Using your tax refund to buy life insurance can be a smart financial move, offering potential discounts and peace of mind. However, it’s essential to consider your unique financial situation and other potential uses for your refund. For many, life insurance is a central part of financial planning, just like maintaining strong credit. Whether you’re applying for a mortgage, credit card, or personal loan, your credit score will be a deciding factor. You can check your credit score and credit report for free with Experian.

At O1ne Mortgage, we’re here to help you make informed financial decisions. If you have any mortgage service needs, call us at 213-732-3074. Let us assist you in securing your financial future.