3 Reasons Why Permanent Life Insurance Might Be Right for You
Purchasing life insurance can be a very wise decision for many individuals. Life insurance is a powerful financial tool that can provide critical protection for your spouse, children and other loved ones. In the event of your death, your family can use a life insurance death benefit to pay off debt, replace your income and fund major life goals.
Keep in mind that not all life insurance is the same, though. There are many different types of insurance, but most fall into one of two categories: term or permanent. Term insurance is coverage that lasts for a limited period of time, such as 10 or 20 years. When the period is over, you can renew the coverage or simply let it lapse. Term insurance is popular because it is usually more affordable compared with similar permanent coverage.
However, affordability shouldn’t be your only consideration. While permanent insurance may come with higher premiums, it also has different features and benefits that usually aren’t available with term policies. Below are three such important features:
1.) The coverage lasts for life.
As the name suggests, permanent coverage is meant to cover your entire life. Some policies terminate at age 100, at which point the cash value is simply paid out to you. Assuming you don’t live past age 100 and continue to pay all required premiums, however, your coverage will stay in effect.
That could be important later in life. As you get older, you may experience more health issues. If you need insurance in the future, you may find that the premiums are prohibitive or that you don’t qualify for coverage at all. If you buy a permanent policy today, you only have to go through underwriting one time and the coverage stays in force forever.
When you don’t want to pay premiums any longer, depending on the type of policy you have, you may be able to “pay up” the policy, meaning that your policy will continue to stay in force, but you will not have to pay any more premiums out-of-pocket. (Consult with a qualified insurance professional to see if your policy is eligible for this feature.)
2.) Your cash value accumulates tax-deferred.
A key difference between term insurance and permanent insurance is the accumulation of cash inside the policy. Permanent policies have a cash value account. A portion of your premium goes into this account. It then grows over time—through policy dividends, interest payments and/or investment gains. The method for growth depends on the type of policy.
Growth inside a permanent policy is tax-deferred. That means you don’t pay taxes on the growth until after you take a distribution from the policy. That deferral could help your funds accumulate at a faster rate than they would in a taxable account.
3.) You can use the cash value to generate tax-efficient income.
What do you do with the cash value in a permanent policy? You can let it continue to accumulate, or you can take it out to fund college, retirement or any other goal.
You can take the funds as withdrawals, which may generate tax consequences. But you can also take your cash as loan distributions. Under this arrangement, you can borrow the funds tax-free from the policy, and then repay it over time. If you fail to repay the loan before you pass away, the balance is simply deducted from the death benefit. This unique benefit means that you can potentially take a tax-free stream of income in retirement. Once you reach the limit of tax-free withdrawals (your cost basis), you can switch to taking loans without making repayments, which will simply reduce your death benefit when you pass away.
Depending on the type of permanent insurance policy you choose, there may be numerous other benefits as well. We have a number of unique insurance strategies available to help with many of life’s challenges and goals.
Ready to develop a life insurance strategy that will help you achieve your most important financial goals? Let’s talk about it! Contact us today and we can help you analyze your needs and create a plan that is right for you.
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