Life insurance can provide an excellent opportunity for you to meet many of your goals while still protecting the financial security of your loved ones. All life insurance policies have some things in common-you make payments, called premiums, to the insurance company. When you die, the insurance company pays a death benefit to your beneficiaries. Typically, this death benefit is received income tax-free. Permanent life insurance, however, can also provide a living benefit. When you pay your premium, part of it goes into a cash reserve and accumulates tax-deferred. You can generally access this cash reserve at any time, for any purpose. It can be used for things like education expenses, supplemental retirement income, and many other needs. It also remains in force during the insured’s entire lifetime, provided premiums are paid as specified in the policy
Permanent Life Insurance
Permanent life insurance comes in different forms to meet a variety of needs.
- Whole Life Insurance usually has premiums that remain fixed for the life of the policy. Whole life insurance also builds a savings element since part of the premium is used to accumulate a guaranteed cash value. Dividends, which are not guaranteed and declared annually by the company’s board of directors, may also increase policy cash value.
- Universal Life Insurance is a variation of permanent life insurance that offers flexible premiums and the choice of either a level or increasing death benefit. As in Whole Life, cash value builds within the policy. While there are guarantees built into the policy, the cash value accumulation is based on the policy’s funding, interest rate performance of the company’s general account, and the monthly non-guaranteed costs of the policy.
- Variable Universal Life Insurance is a form of universal life insurance that combines the premium and death benefit flexibility of universal life insurance with the investment flexibility of having the cash placed in any of the underlying investment accounts you may choose. In this case the policyholder bears the investment risk, funding risk, and the non-guaranteed costs of the policy.
When you hear people talking about the “living benefits” of life insurance, they are often referring to one’s ability to access the cash value. Frequently the “living benefits” of the death benefit go unnoticed. Let’s take a look at some:
- Spend down your assets – A common concern for many people during their retirement years is conserving their assets and passing them along to their spouse or children. Owning permanent life insurance, however, allows you to have more flexibility and freedom with your spending habits. You can increase your retirement income and reduce the fear of dying without leaving behind sufficient assets simply by having a death benefit that will replace the assets that you spent.
- Give assets to charity – Charitable giving has many tangible and intangible benefits, from income tax savings to feelings of philanthropy. An often-overlooked benefit is the potential to increase your income through a charitable giving program. If you have assets, like stocks or real estate, that have appreciated substantially, you risk paying taxes on those capital gains if you need to sell them to begin drawing an income. A charitable remainder trust, along with permanent life insurance, can provide the opportunity to increase your income, avoid capital gains taxes, provide a significant benefit for the charity of your choice, and pass along substantial assets to your heirs.
- Maximize your pension benefits – Those of us who will receive a monthly pension from our employers will have to make a very important, and often irrevocable, decision before retiring – which option will you choose for a monthly income amount. Those options determine how much your spouse would receive if you were to die. Often people choose to accept a lower monthly amount in order to continue providing a benefit to a surviving spouse. By owning a permanent life insurance policy, you may have the flexibility to choose a higher monthly retirement income because the insurance will provide needed benefits to your survivors.
Life insurance is one of the most important aspects of a solid financial plan.