How can permanent life insurance help you in retirement? Many retirees have a permanent life insurance policy not only to provide for loved ones’ future financial security but also to take advantage of the policy’s present tax savings and tax-free earnings.
A permanent life insurance policy can be a valuable alternative investment vehicle for those who have maxed out contributions to pensions and IRAs. Read on to discover whether investing in a permanent life insurance policy is right for you.
What is Permanent Life Insurance?
There are two important differences between term life insurance and permanent life insurance. In contrast to term life insurance, which is taken out for a set term of, for example, 10 or 20 or 30 years, permanent life insurance is just that – permanent. It covers the entire lifespan of the policyholder. And unlike term life insurance, permanent life insurance accrues present cash value in addition to paying a death benefit.
For these reasons, the premiums for permanent life insurance can be quite a bit higher than those for term life insurance.
What are the Benefits of Permanent Life Insurance?
- Premiums will not go up as the insured ages;
- The contributions may be subject to a guaranteed minimum rate of interest, or
- Contributions may be indexed to a particular investment fund;
- Earned dividends can be rolled into the policy, or
- Dividends can be used to reduce premium payments, or
- Dividends can be withdrawn and are generally not taxed as income;
- The policyholder can take out loans against the cash value of the policy on very favorable terms;
- The policyholder can withdraw funds from the policy, and it is not taxable as income unless the withdrawal exceeds the amount paid in premiums.
What Types of Permanent Life Insurance are Available?
There are many variants of permanent life insurance available. Here are the five most common forms.
Whole Life Insurance
Whole life insurance policies are the most common form of permanent life insurance, Generally, whole life policies have fixed premiums over the lifetime of the insured, and a present cash value that accumulates over time, albeit slowly at a guaranteed rate of interest. The death benefit will also be fixed.
Policyholders can take loans out against a whole life policy, but if they die leaving an outstanding loan balance that amount will be deducted from the death benefit.
Variable Life Insurance
Variable life insurance offers policyholders an opportunity to deposit their premiums in an insurer’s investment fund. This is not without risk, however, as investments may do well or may do poorly. Some policies have a minimum guaranteed rate of return, some do not. Most will have a guaranteed minimum death benefit.
If the investment fund is doing well, a policyholder will receive dividends, which can be withdrawn, used to reduce premium payments, or rolled into the policy. If the investment fund is doing poorly, the policyholder may pay reduced premiums.
Universal Life Insurance
Universal life insurance policies have all of the advantages of whole life but offer flexibility with both premiums and death benefits. Why is this advantageous? You can skip premium payments, or pay more in premiums, as long as a minimum annual payment is maintained.
Essentially, the premium payment is split into two, one part covering the cost of maintaining insurance and the other going into a savings account of sorts. The policyholder can pay more than is due and max out the amount put into savings under IRS limits.
Here are two common types of universal life insurance:
Guaranteed Universal Life Insurance
As the name implies, this type of policy will accrue present cash value at a guaranteed fixed amount of interest. The policy is also guaranteed not to lapse as long as premiums are paid. This type of permanent life insurance carries the least risk of loss, but also the lowest return, comparably.
Indexed Universal Life Insurance
In contrast to guaranteed universal life insurance, indexed policies are tied to the performance of market funds such as the S&P 500, the Dow Jones Industrial Average, or Nasdaq. Returns may be higher, but so is the risk of loss. Premiums will rise or fall accordingly.
Variable Universal Life Insurance
As the name implies a variable universal life insurance policy is a combination of the features of variable life and universal life. The cash value will be subject to market conditions, you have flexibility with the amount and timing of premium payments within the minimums and maximums set by the insurer, and you can choose a death benefit of the face value or face value plus cash value.
This is a complex form of permanent life insurance, with many variables. Make sure you understand what you are investing in before you purchase and are aware of all of the administrative fees that will be charged.
Survivorship Life Insurance
This is a type of permanent life insurance that covers two lives at once, typically married couples. Survivorship policies payout when the second of the couple dies, and are usually less expensive to purchase than purchasing two separate policies. This is a good choice for you if you and your spouse want to leave money to beneficiaries only when both of you have passed.
Should I Get Permanent Life Insurance for Retirement?
It is always a good idea to consult with a financial advisor when considering investments for retirement. However, if you have maxed out contributions to your 401(k) or 403(b) or are looking for an alternative to purchasing an annuity, permanent life insurance may be perfect for you. Be sure to take a careful look at the administrative fees, which can be exorbitant.
A well-performing policy may pay dividends that will serve as tax-free income in retirement.
Many permanent life insurance policyholders use low-interest loans from their accrued cash value to invest in start-ups, peer-to-peer lending, and REITs online, hoping for a greater return than the cost of the loan. There are many online platforms from which to choose, and you can select the level of risk that you are comfortable with.
Again, permanent life insurance is but one investment vehicle of many from which to choose. But for those who can afford the premiums, it may be the way to plan for a comfortable retirement as well as financial security for loved ones.
About the Author
Veronica Baxter is a blogger and legal assistant living and working in the great city of Philadelphia. She frequently works with Larry Pitt, Esq., a worker’s compensation lawyer in Philadelphia.