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Life insurance often plays an important role in your financial plan, keeping you on track for goals and taking care of loved ones if the unexpected happens. The benefit and value of life insurance as a strategy goes well beyond risk management. At various stages in our lives, life insurance can be an asset as well as offer other financial advantages.
Living Benefits Add Value to Permanent Life Insurance
There are two basic types of life insurance, term and permanent (or whole), which are best known for their primary function of providing a benefit upon death to the beneficiary. However, with the newest types of ‘Hybrid’ policies being available for planning a person can look past the traditional value of life insurance and look at ways that it will benefit all throughout life, including being a possible source of income at retirement.
Term life insurance
Provides financial protection for a specific period of time (e.g. 10, 20, or 30 years), or until a specified age (e.g. Term till age 65), and pays a benefit only if you die during that period. If you outlive your policy, it will expire, and your coverage will end with no benefit to you.
Permanent (whole) life insurance
Provides protection throughout your lifetime, as long as premium payments are made, and offers numerous additional financial benefits. Permanent life insurance policies build equity called “cash value” that accumulates over time. The accrual of cash value, along with tax advantages available with a permanent life insurance policy, allows you to enjoy “living benefits,” including:
Guaranteed, tax-deferred growth
Your life insurance cash value is guaranteed to grow and never decline in value. The cash value adds to your financial security with stable yet consistent growth that supports your financial goals.
“Collateral” for policy loans
Life insurance policies have always offered an opportunity for cash value growth, even some term policies. As time has passed insurance companies have found unique and advantageous ways to help you take advantage of your consistency in premium payments over your lifetime. This is sometimes realized through drawing income from the cash value at retirement, or even before then.
Certain companies offer ‘Preferred Loans’ on your policy which do not require repayment. (be sure to read and understand the guidelines and agreements on those policies, specific to each company). These types of policies allow you to benefit from the premiums you made while working. These policies act as an income source once you are retired, assuming that you followed the plan that was outlined in your original illustration and application. Loans don’t always have to be paid back. Cash value and death benefits are reduced if the loan is not repaid in full.
Although dividend payments on life insurance are not guaranteed to be made many companies have been paying them since their inception, even some since the 1800’s. If a company elects to pay a dividend, you can choose to take the amount in cash, use it to pay back a policy loan, or use it to purchase additional insurance (this is known as paid-up additions). Paid-up additions are typical with a Whole Life Policy and will increase the death benefit and cash value of the policy. Similar to other cash value, reinvested dividends will grow tax-deferred. If you exceed the amount of cash value allowed in your policy, that cash value may become taxable during the life of the policy.
Flexible funds for retirement
You can use your permanent life insurance cash value to supplement your retirement income without some of the requirements and limitations that apply to other retirement accounts, such as 401(k) and IRA retirement accounts. You have several choices, including receiving your dividends in cash, surrendering paid-up additions that you purchased along the way, or taking a policy loan (all of which may have tax consequences or impact the death benefit). In situations where the death benefit is no longer important but the cash value growth is, you can transfer the cash value to an annuity account and begin taking income payments whenever you would like.
Since life insurance cash value is one of the few assets not considered in federal college financial aid estimates. Families may choose to benefit from the ‘investment aspect’ that many life insurance policies offer. Some of the policies fall into the ‘Safe Money’ category due to how they cash value is invested. When it is time for the child to attend college, cash value can be taken out by policy loan, cash withdraw or cash value transferred into an annuity to take withdraws.
There are many ways to leave a legacy utilizing life insurance in addition to providing for your spouse, family and other loved ones. If you own a business, you may consider using a policy as part of a buy-sell agreement to ensure continuity of a small business or to liquidate your ownership stake upon your passing. If you have a favorite charity, you can fund a legacy gift with a life insurance policy, naming the organization as the beneficiary.
Buy early to lock-in insurability
Buying life insurance early in life is the best way to lock in your insurability. This goes toward a parent purchasing for a child, a newly-wed couple buying for themselves or anyone who wishes to make certain they have covered the risk of becoming uninsurable. If you can only afford a term policy now, you can expand your coverage in later years by converting a term policy to permanent coverage before it expires or by adding to an existing permanent insurance policy using an additional purchase option.
Long-term Care or Custodial Care
An option on your life insurance policy to help pay for the cost of long term care is to cash in the ‘paid-up additions’ in your policy to help pay for the cost of care by utilizing the IRS 1035 exchange rule. Doing this will decrease the policy’s death benefit and cash value as well as future dividends. However it could help you to fund long-term care insurance. There are other options for paying LTC premiums with your cash value. A strategy session will teach your more about these options.
Permanent life insurance offers many tax advantages, including tax-deferred growth on cash value accumulation, tax-beneficial access to cash value up to the basis, and normally tax-free distribution of death benefits. Life insurance is also used for estate planning to help cover estate taxes and ensure that the estate owner’s assets can be distributed as desired to family members or other heirs.
Permanent life insurance is a great tool that can add value to your financial plans with benefits you can enjoy during your lifetime, such as accrual of cash value, tax-advantaged growth, and accessibility through loans. Sometimes these living benefits may have tax consequences, so work with your representative and tax advisor to understand your options and determine the best path for reaching your financial goals.
Mohlman Financial offers independent annuity and life insurance product information to the public, and is not a licensed insurance agent or agency. Nothing on this website is a recommendation to buy or sell an annuity or life insurance product. All website content is for educational purposes only. No product companies have endorsed the reviews on this site, nor is Mohlman Financial compensated for reviews. Mohlman Financial does not rate or endorse any specific product, insurance agent or agency and does not warrant any information on this web site. Mohlman Financial does not provide tax, legal, accounting, fiscal, or investment advice. Mohlman Financial claims no liability for any actions or advice given or decisions made in conjunction with this website or the agents on this website. It is your responsibility to research and consult with a licensed financial service professional about your personal situation before making any financial decisions. The strategies found on this website have been provided for an independent network of licensed insurance agents. We hold no liability for any actions or advice given by these independent licensed insurance agents or decisions made by any client in conjunction with this website or agents on this website.