Permanent Life Insurance |
Permanent life insurance is a more advanced form of life insurance than term life. For some individuals, permanent life insurance is much more useful than term insurance in that it is a lifetime financial instrument that provides numerous features and benefits. As its name implies, and unlike term insurance, it is permanent: it lasts your entire life. As long as the policy remains in force, it will pay a death benefit to your beneficiaries, whether your death is in a few years or when you’re 105. 99% of term life insurance policies expire worthless. They serve their purpose of providing a death benefit during a period of time, but they almost always end up not paying a dime to anyone. With permanent life insurance policies you will know that one day – whenever it is – it will pay a death benefit to your beneficiaries while building cash value in the meantime.
Permanent life insurance policies have two primary benefits: to provide a death benefit upon the insured’s death and a cash value that builds over time as the policy is credited with interest/dividends periodically. The cash value will be built in a tax-advantaged manner: no taxes are ever due on the interest/dividends that credited to your account. That cash value can be used in a variety of ways at any time and TAX-FREE. Here are some examples of the LIFETIME benefit of funding a permanent life insurance policy:
Tax-exempt Retirement Income
There are only 2 paths to tax-free retirement income: a Roth account, whether it’s a Roth IRA or 401k (if your 401k plan even has this option), and life insurance. If you’re above the Roth IRA income limits ($124,000 for single people, $196,000 for married couples filing jointly) then you can’t fully contribute to a Roth IRA. That leaves one choice for tax-free retirement income: permanent life insurance.
Permanent life insurance policies can be structured so that the premiums are paid only during the working years and then cash can be pulled out of the policy either on an ad hoc or structured, periodic basis in order to provide retirement income. This money arrives to you tax-exempt: not only will you not pay taxes on this money, it will not count against you in terms of “provisional income”, which is what is used to determine how much of your Social Security income is subject to taxation. This means that you’ll be getting tax-exempt money in your retirement as compared to using tax-deferred assets (401k/IRA) to provide retirement income, which will be taxed.
Permanent life insurance can also provide a much higher sustainable withdrawal rate for income purposes than by traditional liquidation of tax-deferred (401k/IRA) assets. The standard rule-of-thumb in the investment world is that you can cash out 4% of your retirement assets, such as your 401k and IRA, each year during retirement safely so that you won’t run out of money in retirement. In today’s low-interest rate environment, however, Morningstar* puts that withdrawal rate at 2.8% for a 30-year retirement and a 90% chance of not running out of money before you die. However, through a properly funded and structured life insurance policy, this withdrawal rate can be 6% or higher (please contact me for an illustration for your particular situation).
Be Your Own Bank
With permanent life insurance, you will be building cash value within your policy. This cash can be pulled out of the policy at any time and used for anything you need to purchase. Suppose that you want to buy a new car. You could go to a bank or the manufacturer’s auto financing arm to secure a loan and purchase your shiny new car. OR … you could pull out cash from your permanent life insurance policy, buy the car, and then pay yourself back by putting the money back into the life insurance policy over time. Instead of enriching a bank, you’d be paying yourself.
A 529 Alternative
College is incredibly expensive, there’s no getting around that fact and it only gets more expensive every year. A parent will want to make sure that if they should die prematurely that their children can still go to college. This can be covered through a permanent life insurance policy’s death benefit (or in combination with a term life insurance policy’s death benefit). But it can also be used as a funding vehicle for the kids’ college: when the kids go off to college, cash can be loaned out of the policy to cover tuition, room, board, computers, fees, and gas to come home and see mom and dad. Unlike a 529, these expenses aren’t restricted to just the categories mentioned, the cash value can be used for anything. A 529 is restricted to pure and direct educational expenses and requires record keeping in case the IRS has questions. With a permanent life insurance policy, you’ll have death benefit coverage in the event that you die before the kids get through college, and you’ll have cash value that can be used to pay for all of those expenses when the time comes. Assuming that you choose to repay those loans out the policy, you’re paying yourself back and not paying interest to Sallie Mae, a bank, etc. Finally, life insurance cash value is typically not taken into account in financial aid applications as an asset if there is the need for that.
Permanent life insurance policies can also be taken out on the children to be used as a 529 alternative. Children are typically pretty easy to insure and they’ll have the policy the rest of their lives so if one day they become uninsurable they’ll already have coverage in place. By funding a permanent life insurance policy on your children, you’ll be giving them a leg up in their financial lives for the rest of their life.
Permanent life insurance policies have two primary benefits: to provide a death benefit upon the insured’s death and a cash value that builds over time as the policy is credited with interest/dividends periodically. The cash value will be built in a tax-advantaged manner: no taxes are ever due on the interest/dividends that credited to your account. That cash value can be used in a variety of ways at any time and TAX-FREE. Here are some examples of the LIFETIME benefit of funding a permanent life insurance policy:
Tax-exempt Retirement Income
There are only 2 paths to tax-free retirement income: a Roth account, whether it’s a Roth IRA or 401k (if your 401k plan even has this option), and life insurance. If you’re above the Roth IRA income limits ($124,000 for single people, $196,000 for married couples filing jointly) then you can’t fully contribute to a Roth IRA. That leaves one choice for tax-free retirement income: permanent life insurance.
Permanent life insurance policies can be structured so that the premiums are paid only during the working years and then cash can be pulled out of the policy either on an ad hoc or structured, periodic basis in order to provide retirement income. This money arrives to you tax-exempt: not only will you not pay taxes on this money, it will not count against you in terms of “provisional income”, which is what is used to determine how much of your Social Security income is subject to taxation. This means that you’ll be getting tax-exempt money in your retirement as compared to using tax-deferred assets (401k/IRA) to provide retirement income, which will be taxed.
Permanent life insurance can also provide a much higher sustainable withdrawal rate for income purposes than by traditional liquidation of tax-deferred (401k/IRA) assets. The standard rule-of-thumb in the investment world is that you can cash out 4% of your retirement assets, such as your 401k and IRA, each year during retirement safely so that you won’t run out of money in retirement. In today’s low-interest rate environment, however, Morningstar* puts that withdrawal rate at 2.8% for a 30-year retirement and a 90% chance of not running out of money before you die. However, through a properly funded and structured life insurance policy, this withdrawal rate can be 6% or higher (please contact me for an illustration for your particular situation).
Be Your Own Bank
With permanent life insurance, you will be building cash value within your policy. This cash can be pulled out of the policy at any time and used for anything you need to purchase. Suppose that you want to buy a new car. You could go to a bank or the manufacturer’s auto financing arm to secure a loan and purchase your shiny new car. OR … you could pull out cash from your permanent life insurance policy, buy the car, and then pay yourself back by putting the money back into the life insurance policy over time. Instead of enriching a bank, you’d be paying yourself.
A 529 Alternative
College is incredibly expensive, there’s no getting around that fact and it only gets more expensive every year. A parent will want to make sure that if they should die prematurely that their children can still go to college. This can be covered through a permanent life insurance policy’s death benefit (or in combination with a term life insurance policy’s death benefit). But it can also be used as a funding vehicle for the kids’ college: when the kids go off to college, cash can be loaned out of the policy to cover tuition, room, board, computers, fees, and gas to come home and see mom and dad. Unlike a 529, these expenses aren’t restricted to just the categories mentioned, the cash value can be used for anything. A 529 is restricted to pure and direct educational expenses and requires record keeping in case the IRS has questions. With a permanent life insurance policy, you’ll have death benefit coverage in the event that you die before the kids get through college, and you’ll have cash value that can be used to pay for all of those expenses when the time comes. Assuming that you choose to repay those loans out the policy, you’re paying yourself back and not paying interest to Sallie Mae, a bank, etc. Finally, life insurance cash value is typically not taken into account in financial aid applications as an asset if there is the need for that.
Permanent life insurance policies can also be taken out on the children to be used as a 529 alternative. Children are typically pretty easy to insure and they’ll have the policy the rest of their lives so if one day they become uninsurable they’ll already have coverage in place. By funding a permanent life insurance policy on your children, you’ll be giving them a leg up in their financial lives for the rest of their life.
