Permanent Life Insurance

In contrast to term life, Permanent or cash value life insurance is designed to provide a lifetime of protection for your loved ones and estate. Can permanent life insurance be viewed as an asset class? Can it help with expenses for retirement, college funding, or major purchases? Colleges, corporations, endowments have been using permanent life insurance in their portfolios for years.

Permanent or cash value life insurance can provide features such as:

Death benefit protection during working years
Estate planning issues
Tax - deferred growth potential based on performance of an index such as the S&P 500 with pre-determined caps
To participate in market performance with no market downside
Supplemental retirement income - cash value can be accessed from the policy via withdrawals and loans 100% tax free as long as the policy stays in effect
Policy loans and withdrawals, in addition to tax exempt distributions are also exempt from the 3.8% medicare surcharge
Life insurance cash values, like 401k's and IRA's are not included in the expected family contribution calculations for college financial aid
No RMD's (Required minimum distributions) on life policy cash value distributions

There are 2 main types of permanent life insurance: Whole Life and Universal Life

Whole Life

Like term life, the main reason to own whole life insurance is to provide a death benefit to family members at death.

However, unlike term life insurance, whole life insurance is considered permanent life insurance. Instead of the policy expiring when a specific term period is up, 10, 20, 30 years, whole life insurance provides coverage for your entire life as long as you continue to pay premiums. Unlike term, whole life insurance also includes a component that can accumulate cash value. Which is one of the key elements of whole life insurance. 

Whole life insurance, like any permanent life policy will typically have higher premiums than term coverage since whole life insurance never expires and can earn cash value. You may find the benefits of whole life may be worth the extra premiums.

Features of whole life:

Guaranteed level fixed monthly premiums that will never increase as long as premiums are made and there is no lapse in coverage.

Guaranteed death benefit that your beneficiaries will receivebut may be reduced by the amount of any policy loans that have been accessed.

No need to replace your life insurance policy after a specific term has expired with a new policy, and face potentially higher premiums based on your current your age or health status

Guaranteed cash value, each time you pay your premium, a portion is used to provide you with life insurance coverage. The remainder is set aside and allowed to accumulate. This savings component, called cash value or loan value, builds over time and can be used for wealth accumulation, or even taken out as a loan against the policy.

Principal protection - The cash value that your whole life policy accumulates isn’t subject to stock market losses and maintains stability over time.

Guaranteed money growth - Regardless of how the market performs, the money you earn continues to grow at a fixed interest rate.

Additional income - The cash value of a whole life policy can be converted into an annuity, which can provide you with additional income for life.

A source of cash with no penalties - Your whole life policy can be a source of funds to help you meet expenses. Unlike 401(k)s and IRAs that penalize you for accessing your money prior to retirement, a whole life policy would allow you to borrow available funds for any reason and pay it back when you like without paying taxes or penalties.

Dividends – Many whole life policies typically pay out annual dividends (money paid to you off the insurer’s profits). This cash can be used to purchase additional life insurance (paid-up additions) that increases both the total death benefit and cash value of your life insurance policy. You can also take some or all of the dividends in cash — tax free. However, these dividends are not guaranteed.

Universal Life (UL)

A universal life insurance policy is a unique combination of life insurance protection, policy options, and cash value building elements. Like whole life, universal life insurance is considered a type of permanent life insurance policy with the potential to earn cash value, however the death benefit and cash value may be reduced by the amount of any outstanding loans and interest upon your death. Universal life insurance is typically more flexible than whole life insurance, allowing you greater control over several important policy components.

Features of Universal life insurance:

Premiums that are often lower
than whole life insurance

The ability to set the guaranteed number of years you want the policy to be in force (or even for your entire lifetime)

The ability to use any cash value that may accumulate to adjust your premium payments and death benefit (within the limits of your policy)

Flexible Premium Payments - To keep your life insurance policy in force, you need to make your premium payments to cover the cost of the insurance. Regular whole life charges a flat premium rate that you aren’t able to adjust. However, within the limits of your contract, universal life will let you adjust how much premium you pay and how often you pay it. You can also use any cash value in your policy to cover your premiums.

Flexible Amount of Time That Policy Will Stay In Force
When you first buy some types of universal life insurance, you are able to decide how long you want to guarantee that the policy will remain in force. You can choose a set period of years, up to your entire lifetime. A longer guarantee period makes the cost of your insurance higher. A shorter guarantee period means the cost of your insurance will start out lower but will begin going up once the guarantee period ends.

Non-taxable death benefit

May allow you to take out policy loans or surrender for cash

Offers a cash value that grows tax-deferred (you pay taxes on earnings if withdrawn, policy loans are tax-free)

Flexible Cost Adjustment - If you buy the type of universal life policy that contains guarantees that the insurance will remain in force, you can also choose how the policy adjusts for the rising cost of insurance after the guarantee period. With most such universal life policies, after the guarantee period ends, your premiums will increase. In addition to traditional universal life policies, some carriers offer a product that adjusts the death benefit instead. This means that the premium of your policy will remain level even after the guarantee period ends, while your death benefit will begin getting smaller to make up for the higher cost of insurance.

Index Universal Life(IUL):

Indexed universal life (IUL) is a type of universal life policy that provides permanent life insurance protection, along with additional savings and an even greater potential for growth than basic universal life through indexing of interest credits. 

The premium payments you make to your IUL policy have the potential to earn interest and grow the cash value of your policy. What makes IUL different is the way interest is credited to your policy. In addition to offering a traditional declared interest rate, IUL offers the opportunity to earn interest that is linked to the performance of a choice of market indexes, the most typical of which is the S&P 500.

The amounts credited to the cash value in your IUL grow tax-deferred, and may be used to pay insurance premiums, providing the flexibility to reduce or even stop making out-of-pocket premiums payments as long as the minimum premium payment is being met.

As with a regular universal life insurance policy (UL), IUL allows for a flexible premium. This means you can choose to contribute more to your policy in order to help you build up your cash value even faster. However, note that many IUL policies have policy caps, whereby you’re allowed to earn only a maximum amount of indexed interest credits per year. This means you’ll have a limit on how much you can earn even if the index does extremely well, although you also have the advantage of market stability with zero market downside protection. 

Most IUL policies come with a guarantee that you will be credited a certain amount during a given time period — regardless of how the market performs. So if the index goes down in a year, your cash value won’t. Granted, this could be as low as one percent (or just a guarantee of floor protection so you don’t lose money), but nonetheless, it’s an assurance that you won’t lose your cash value due to decreases in the index.  It’s important to note that the account value, any policy loans or surrenders may be subject to policy charges, surrender charges, and transaction fees, and may reduce the cash value and death benefits of your policy.

An IUL policy can provide loved ones with the protection of a permanent life insurance policy along with the potential to build tax-deferred savings and protecting your cash value from market losses

Request a quote or call us at 973-285-1040 to discuss your life insurance needs. We'll be happy to review which coverage options work best for you

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