For years popular media, and some financial advisors, have promoted term life insurance as the only wise option when purchasing a life insurance policy. Of course, there are good reasons for purchasing term life insurance.
- The premiums for term life insurance, during the initial term period, are significantly lower than permanent life insurance during that same time. As such, you can afford to purchase much more term life insurance than permanent life insurance when you are young and healthy.
- Term life insurance is simple to understand. Like auto and homeowner’s insurance, you purchase a specific amount of insurance, pay a set premium, and, if you pass away while the policy is in effect, your beneficiary will receive the death benefit.
However, there are some downsides about term life insurance that are important to be aware of as well.
- If you don’t pass away during the term period, you lose all the money you paid into the policy. The only way to “win” with a term life insurance policy is to die younger than you probably want to.
- If your health deteriorates during the term but you still outlive it, you may not be able to qualify for another life insurance policy and will be stuck paying significantly higher premiums to keep life insurance or be forced to drop your policy when you need it most because you can’t afford it.
- Many people who purchase term life insurance based on the premise of “buy term and invest the difference” fail to follow through with the “invest the difference” part of that plan. They either do not save enough for retirement or do not properly diversify their investments and tax burden.
So, what are some benefits of permanent cash value life insurance coverage?
- It is guaranteed to pay out regardless of what age you die. Many people who buy term life insurance will see that term end in their 60’s or 70’s. At that point, they may no longer have access to life insurance coverage, or it could come at an extraordinarily high cost. If you were to die during the following decade of life your spouse could still have another 20 – 30 years left of life at a time when they may no longer be in the workforce. Will they have enough money saved up to comfortably support themselves for that long?
- It provides a source of tax-free retirement income. Do you think taxes will be higher or lower when you retire? If you think tax rates will be higher, how much of your retirement savings is invested in an account that you can withdraw money from tax-free? If you are investing all your money into tax-deferred accounts, you may be exchanging paying lower taxes on a lesser amount of money now for paying higher taxes on a higher amount of money later. Does that make sense? There are two main types of accounts that offer tax-free retirement income: a Roth account and a cash value life insurance policy. However, while a Roth has contribution limitations, an age limit for withdrawals of earnings, and does not offer an enhanced death benefit, a permanent cash value life insurance policy does not have those same limitations and offers an enhanced tax-free death benefit.
- It offers growing cash value, decreasing premiums, and a growing death benefit without additional underwriting. While you start out paying less for a term life insurance policy in comparison to a permanent cash value policy, when the term ends you will have to requalify for a new policy and/or pay significantly more money for the same or less coverage. The opposite is true for a cash value permanent life insurance policy. Over the same period of time you can actually choose to lower your premium payment and grow your death benefit. In fact, you could stop paying any premiums at all in as short a period of time as 10 years and your death benefit and cash value will continue to grow for the rest of your life.
- It provides a built-in tax-free inheritance for your children and/or grandchildren for pennies on the dollar. Instead of worrying about how much of an inheritance you are going to leave your family or worrying if you will be able to afford to leave them any money, why not determine now what their inheritance will be? You can then purchase their inheritance at a significantly discounted price now and spend all of your retirement money guilt-free later.
- It can offer increasing long-term care benefits at a locked-in premium amount. Most, if not all, traditional long term care policies do not lock in a lifetime premium and are subject to rate increases. Furthermore, if you never need long-term care benefits you will lose all the money you pay into a traditional long-term care insurance policy. However, with a cash value permanent life insurance policy that includes a long-term care rider, you get a locked-in rate, a growing long-term care benefit pool of money, access to tax-free money for supplemental retirement income, and a death benefit to pass on to your beneficiaries if you never need long-term care.
A cash value permanent life insurance policy can be an important part of a diversified financial portfolio. It provides a variety of retirement benefits, low financial risk, and, most importantly, guaranteed lifetime financial protection for you and your family.