When most people think about or buy life insurance, it is typically “term life insurance,” which as the name suggests provides life insurance coverage at a fixed rate of payments for a limited period of time. Why is this? Is it because they have heard the ever-popular phrase “buy term, invest the rest,” or because they just don’t understand what the alternative – permanent life insurance – is and why it costs so much more than term?
In all likelihood, it is a combination of both. And, while “buy term, invest the rest” may be sound advice for some, there are many cases where incorporating at least some permanent life insurance into your portfolio may be one of the best decisions you have ever made. There are two main reasons for this. The first being a “permanent death benefit” and the second being the “living benefits” of the policy.
The Permanent Death Benefit
Why a permanent death benefit? Many people realize they still want and need a death benefit after their term policy expires. The obvious problem with realizing this AFTER your term policy has expired is, by that time, the premium you’ll pay is likely too cost prohibitive or even unobtainable due to older age and insurability for health reasons. This is exactly why buying permanent coverage earlier in life or at least buying a good convertible term policy to lock in insurability is so important.
Many people do not have enough money saved for when they expect to pass away, and a permanent death benefit is one way to all but guarantee that does not happen. Consider the people who have saved diligently to create a nest egg or even substantial capital assets to carry on after they die. Are the assets liquid and easily split between heirs? Will they be taxed at liquidation? We currently live in one of, if not the most, favorable tax environments for generational wealth transfer in our country’s history, but will that always be the case? I think most Americans agree that no matter what political party is in charge taxes will inevitably go up in a big way for most of us in the future.
It’s my opinion that we will see a return of “the death tax” in our lifetimes. We already have with the new stretch IRA legislation and lots of talk to substantially reduce the threshold of other estate taxes. Do you really want Uncle Sam to hold a blank “I owe you” check with your name signed as the payor when you die, leaving your heirs to unwind assets to pay the taxes? The simple reality is that those taxes might very well substantially increase their own graduated tax rate on working adults after potentially forcing an unwanted liquidation of assets just to pay those taxes. A permanent death benefit can help you avoid this outcome for your kids as well as your grandkids.
The Living Benefit
We also must consider the importance of another benefit associated with permanent life insurance. Indeed, the living benefits of some permanent life insurance policies are just as impressive as the permanent death benefit. Many policies carry a long-term care rider that allows a substantial portion of the death benefit to be payable for living long term care costs. With the burgeoning cost of long-term care on the rise, this alone is an invaluable benefit to keep from spending down a lifetime worth of savings and/or to shift the burden of care to close family and friends. Many policies can go a step further by custom-tailoring the expectations of long-term care into the policy to maximize the intended benefit.
There is yet another powerful attribute to some permanent life policies called cash value accumulation. Imagine a financial instrument that provides safe tax-free growth, tax-free distribution, competitive return, and high contribution limits as well as a great amount of liquidity, use, and control? This is the product of compounding growth cash value life insurance. While merely funding a face value permanent death benefit might cost $6,000 per year with certain minimum guarantees, one could fund the same death benefit to the tune of closer to $50,000 per year. This difference is what we call “over funding” the policy to the IRS Modified Endowment Contract limit.
The goal of many overfunded policies is to minimize the death benefit, thereby minimizing the cost of insurance while maximizing the internal compounding growth of the policy. At some point you no longer fund the policy and instead take not only tax-free distributions but 1099 free distributions that can be modified or adjusted at any point before or after retirement. These policy distributions are really you borrowing money from your future death benefit in order to make major capital purchases, paying for college or weddings, supplement retirement income, or to offset cyclical market investment volatility so your invested assets can continue to grow once the market recovers. Regardless, the end result is a safe investment that might not only vastly improve quality of life in retirement but practically guarantee a safe, thoughtful and controlled transfer of wealth from generation to generation.
Permanent life insurance has received some bad publicity over the years and perhaps some of it was previously warranted. Some of the policies relied on historically high interest rates to fund high internal policy costs while still others were sold using unrealistic illustrations or misleading predictions. Like with anything else, working with someone who fully understands the nuance of permanent life insurance truly matters. When considering permanent life insurance always have your financial professional stress test the policies so you can be sure and comfortable with your investment. When properly researched and implemented, permanent life insurance can be a very powerful tool to complement your other financial planning. After all, life insurance is one of the very few financial products out there that can guarantee the intended financial outcome for your family if something were to happen to you. Shouldn’t you at least consider it?
The information contained in this article is general and is provided for educational purposes only. It is not intended to provide legal or tax advice. You should not act on this information without consulting your own legal counsel and/or other knowledgeable advisors.
Beck Smith is an experienced consultant with GriffinEstep Benefit Group who routinely advises business owners on income and asset protection as well as other advanced insurance planning needs. Established in 1998, GriffinEstep is a leading independent, full-service insurance brokerage company with a team of consultants dedicated to clients, not insurance companies. GriffinEstep provides a unique combination of national expertise and local presence along with the knowledge, insight, and technology necessary to customize the individual insurance needs of its valued clients.
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