Life Insurance and Retirement – Getting the Most for Your Money
You’ve heard that life insurance can be a valuable retirement savings tool, but do you really know how that works? A life insurance attorney pointed out that it’s important to know the basics of life insurance before you make any choices in regards to choosing life insurance. He added that it’s best to be proactive and learn what you can before purchasing anything. This article will set forth the benefits of permanent life insurance and help you decide whether you want or need this type of policy in retirement.
What is Permanent Life Insurance?
Permanent Life Insurance is a type of insurance policy that covers the insured for their entire life, as long as premiums are paid in full and on time. Unlike term life insurance, which has a fixed term and only pays out if the insured dies within that term, permanent life insurance has both that death benefit and accrued cash value. Accordingly, the premiums will be a bit higher than term life insurance policy premiums.
What are the Benefits of Permanent Life Insurance?
Your premiums grow tax-free. You can also borrow against the cash value of your policy and in some cases withdraw from it. If you receive dividends from your policy, dividends are not taxed as income tax. Some forms of permanent life insurance offer variable premium payments and variable death benefits.
What Types of Permanent Life Insurance Are Available?
The most common forms of permanent life insurance are whole life insurance, universal life insurance, variable universal life insurance, and indexed universal life insurance.
Whole Life Insurance
For most whole life insurance policies, both premiums and the amount of the death benefit are fixed throughout the life of the insured. Whole life policies offer a guaranteed rate of return, meaning, your accrued premiums will earn at least a stated minimum amount of interest,.
Some policies pay out dividends, much like investments in the stock market. If a whole life policyholder exercises their option to receive dividends as cash payments, that is not taxed as income unless it exceeds contributions. Policyholders also have the option to leave dividends in the account to accrue interest or to use them to reduce the amount of premium they must pay.
Universal Life Insurance
A universal policy will offer more flexibility than a whole life policy. A universal life insurance policyholder may be able to increase the death benefit or reduce premiums once the policy gas accrued a certain amount of cash value. Otherwise, a universal life policy has the same benefits as the whole life.
Variable Universal Life Insurance
Investment options will vary with this type of permanent life insurance policy. The insured may be able to choose among different investment options to potentially increase the cash value. However, as with any market investment, the policy will be subject to losses as well as gains. Losses could potentially reduce the present cash value as well as the death benefit.
Variable Universal Life Insurance policies also offer adjustable premiums and death benefits.
Indexed Universal Life Insurance
Indexed universal life insurance comes with no fixed interest rate and instead is indexed to a certain performance fund, such as the S&P 500. But unlike investing directly in that fund, which would expose you to the risk of loss, your payments into an indexed universal life insurance policy are protected by a minimum rate of interest.
When Do I Need Permanent Life Insurance?
- You want to secure your family’s future;
- You have maxed out retirement account contributions and need somewhere else to put retirement savings;
- The market is down and you want to invest, but assume little risk;
- You have retired and have identified a policy that pays guaranteed dividends, providing you with income in retirement;
- You have retired and you’ve identified a policy that offers dividends that largely cover the cost of premiums, so the policy is self-maintaining;
- You want the ability to borrow from the policy at a very low rate of interest.
Are there Disadvantages to Permanent Life Insurance?
Yes. Premiums are higher than term life. If you withdraw or borrow against the policy and die while that amount is outstanding, the death benefit will be reduced by that amount. If you withdraw or borrow against the policy and delete the account entirely, your policy could lapse and you would lose coverage.
Because premiums tend to be high, permanent life insurance is not for everyone. For most people, term life insurance meets their goal of providing for replacement income should something happen to them. But for those with above-average income, a permanent life insurance policy can serve as a valuable component of an overall retirement savings strategy. Shop around for the type of permanent life insurance policy that satisfies your risk tolerance, offers you the amount of flexibility you need, and meets your financial goals.