Financial Benefits of Permanent Life Insurance

What is Permanent Life Insurance?

Permanent life insurance provides coverage for your lifespan and your beneficiaries will receive a death benefit after your passing.  There are two types of permanent life insurance: whole and universal life. Whole life insurance caters to long term goals.  It offers the consumer consistent premiums and guaranteed cash value accumulation. Whereas, Universal life insurance offers consumers flexibility in their premium payments, death benefits and the savings element of their policy.  This does however, make premiums higher than normal policies.  With that being said, if you need lifetime coverage and have the means to pay for a permanent life insurance policy, this can be a way to ensure your loved ones have security after you’re gone.

What is Permanent Life Insurance Cash Value?

A majority of permanent life insurance policies have a cash value component. This is similar to an investment account.  Cash value life insurance refers to any life insurance policies that not only have a death benefit but also accumulate value in a separate account within the policy.  Each time you make a permanent life insurance premium payment, a portion of the money goes into a cash value account.  This account grows at a rate specified by the policy. Once the cash value has reached a certain size, you can borrow money from the insurer and use it as collateral.

  1. Policy loans don’t require credit checks or qualifications since the insurer holds the money to cover the loan.
  2. The loan doesn’t have to be paid back within a particular period of time.

However, take these major factors into consideration before securing your loan:

  1. You will be charged an interest rate on policy loans.
  2. If the loan plus unpaid interest exceeds the size of the cash value, your policy will lapse and you can lose your coverage.
  3. If you die before the loan is paid back, the loan amount will be deducted from the death benefit your beneficiaries receive.
  4. The cash value is separate from the death benefit of a permanent life insurance policy.  When you pass away, your beneficiaries will typically not receive any of the cash value.

For some permanent life insurance policies (only with universal life), you’re able to pay premiums using the policy’s cash value. This is somewhat risky because your policy will lapse if its cash value reaches zero.

The cash value of permanent life insurance does offer a measure of protection as, if you ever decide to give up your coverage to the insurer, you would get the cash value back. During the first several years of coverage, there are surrender charges, so you wouldn’t get the entire accumulated cash value. However, you’d still be able to recoup a portion of the money you’ve paid.

What are Permanent Life Insurance Dividends?

If you have a participating policy from a mutual life insurance company, permanent policies can also pay out dividends.  Dividends are return of excess premium.  (Mutual life insurance companies are owned by their policyholders so, if the insurer brings in more money than is spent, the profits are distributed as dividends).

Participating policy dividends can be paid out in 4 ways:

  1. Cash – the insurance company sends you a check for the dividend amount.
  2. Premium Payments – your dividend can cover and pay up your premium payments.
  3. Savings – dividends may be deposited in your policy’s cash value and allowed to earn interest.
  4. Buy More Insurance – dividends may be used to buy paid-up coverage.

Please note that dividends are not subject to income tax if taken out in the following scenarios because distributions are not made directly to you.  If the amount of the dividend is less than your insurance premiums for the year, dividends are considered a return of premium and are not taxable:

  1. Pre-pay premiums
  2. Added to your cash value
  3. Used to buy paid-up additions to your permanent life insurance policy

Ultimately, there are many things to consider with a permanent life insurance policy.  Aside from the life insurance policy payout to your beneficiaries once you’ve passed, we briefly discussed a few of the other financial benefits of permanent life insurance.  Please keep in mind that every policy is different.  We urge you that before buying permanent life insurance coverage, read the fine print.  Discuss different types of policies and coverages with a certified Insurance Agent to make an informed decision.  Please feel free to give us a call to get you started.