Knowing Your Permanent Life Insurance

Hello All,

Permanent life insurance is life insurance that is available for your use until your death – no matter when that is. Unlike term insurance, there is no ending period or termination date for your policy. Many times, permanent life insurance is also called ‘cash value’ life insurance because the premiums you pay are for ‘pure’ coverage and any associated expenses, with the remainder of your balance in a cash value account managed by the insurance company. The cash value of your policy grows depending on the type of policy you buy (universal life, whole life, or variable life). Any interest and earnings are tax-deferred until withdrawn or become part of the death benefit amount when you die. Permanent life insurance usually has a higher premium than term life insurance.

As with any insurance, it is very important to keep paperwork and/or company name available to your beneficiaries when the time arises. It is as simple as registering on a life insurance database to guarantee this information will never get lost.

Many people use permanent life insurance to cover long-term needs since the coverage you pay premiums on is good for the rest of your life. There is no annual renewal, no need to provide proof you are insurable (i.e. medical exams) and the policy locks your premiums so you don’t need to fret over increasing premium costs as you age or if your health declines. Cash value policies are similar to annuities in that all the interest and earnings grow income tax free unless you surrender the policy or begin to withdraw from the account. You can actually grow quite a bit of equity in your policy over the years and may actually end up with a benefit greater than the initial amount of the policy.

You are allowed loans and withdrawals from the cash value account of your policy, with a fixed or variable rate interest assigned to loans. However, if you withdraw a loan against your account it will reduce the overall amount of death benefit available to your beneficiaries by the amount of the loan. It will certainly reduce the available cash value and could conceivably cause the policy to lapse. If you surrender the policy with an outstanding loan you could also face heavy tax penalties. Withdrawals from the policy are tax free up to the amount you’ve paid in premiums but this may not be the case if your policy is considered a Modified Endowment. Withdrawals and loans from a Modified Endowment  policy are taken first from earnings, making them fair game for income tax laws.

Unfortunately, the advantages to a cash value, permanent life insurance policy are weighed with a few disadvantages. First, premiums for permanent life insurance are usually higher than for a comparable term policy, at least during the early years. Initially, you are paying more than is needed to pay for the insurance so you build the cash value account, or fund, in order to offset the higher cost of insurance when you are older. It is also possible to purchase a variable life insurance policy. Variable life insurance policies use investment opportunities to grow your cash value account, leaving them exposed to financial gain or loss depending on how the investments perform. Losses directly cut into the value of your cash account and could affect the total amount of the policy on your death; a minimum death benefit is almost always guaranteed, however.
 
Until next time,

Michael Hartmann
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