What is Permanent Life Insurance?

 

What is Permanent insurance?

Unlike Term insurance that is designed to pay out "If” you die in 10, 20, or 30 years, permanent insurance is designed to pay out “When" you die. Aside from lasting your entire life, permanent insurance has a built-in saving component called cash value.  When set up the right way this cash value can grow tax free, and be used income tax free.  The major drawback however is that it can take a number of years for there to be an adequate amount saved net of premiums put in.

Why would I need insurance for my entire life?

The need for life insurance often persists long after the kids have graduated college, because people are living longer lives. If you died the day after you youngest child graduated college or once the house was paid off, your spouse may outlive you by 10, 20, or 30 years. With fewer pension plans, the uncertainty of social security, and the rising cost of health care   most financial plans will struggle without life insurance to maintain your loved ones have grown accustomed to.

Why not buy inexpensive Term and Invest the difference? 

In a perfect world this strategy makes a lot of sense, but below are a couple of reasons why that plan may fall short of your goal.

1.  Most people that use this strategy never actually execute the "invest the difference” part. Something always comes up in life, an unexpected crisis, tuition, and medical bills to name a few.  Many term policy are canceled because of a short term crisis, and at the end of the day many people are left uninsured later life and unprepared for retirement.

2. Emotions can get the best of us, and emotional investing can lead to bad decisions. For example buying when market looks great, and selling when everything looks bad.  The end result is an account that perpetually underperformed the market.

3. Tax treatment of the cash value is Tax Free! Unlike a brokerage account cash value growth is typically tax free, and the distributions are income take free. When you “invest the difference” in a brokerage account you will eventually pay capital gains and income tax, yet the cash value in life insurance doesn’t experience either.

The best way to look at Term and Permanent insurance is to have combination of both and use them to your advantage.

Types of Permanent insurance 

The insurance industry has given Permanent insurance many names of the years, but all of them fall in to two categories Whole Life and Universal Life.

Whole Life

Whole life is the most common name for permanent insurance, and as the name implies it is designed to last your whole life. The premiums are fixed, death benefits typically don’t change, and the cash values are very predictable. Most policy’s come with a table that will tell you exactly what the cash value will be in a given year. This can be very attractive for people looking for steady long term growth. The drawback to Whole life is that it can be expensive. The reason for this is because the insurance company is taking all the risk.  Insurance companies are very good at predicting death but they really don’t know when someone is going die, their operating expense rise over time, and then they still have to guarantee growth of money over a person’s life time.  Because they have to guarantee growth, you have no control of over what you are invested in. Thankfully, the government  regulates what an insurance  company can invest in, and  typically they can invest no more than 10% in the stock market, while the rest is in government treasury’s, high quality mortgages, and commercial  real estate. Much of what is in a whole is guaranteed but as a consumer you will pay a premium for it.

Universal Life

The other type of permanent insurance is universal life; it is typically 30% to 40% cheaper than whole life, and is the most sold permanent policy today. What makes Universal life so attractive is its flexibility and choice when it comes to how your cash value grows. Its drawback when compared to whole life is that its guarantees aren’t as strong.

Universal Life is designed to be flexible with the ups and downs of the modern worker. There’s always a minimum payment that needs to be paid to keep the policy going, and the option to pay a much higher maximum payment that is set by the government. The death benefit is flexible, allowing you to add more protection when you need it, or reduce the benefit over time as long as you meet the minimums of the policy. The reason for this is to give you choice. No one’s finances remain the same for their whole life, so as your financial circumstances change, so can your policy.  An example of this is you can start paying the minimum premium and then increase it over time, or you can start out paying a higher premium to reduce how much you will pay down the road. In some instances you may be able skip premiums all together.

Unlike whole life which grows your cash value based on what the insurance company can earn, a universal policy gives the owner the choice of how the cash value grows. Some owners use current interest rates to grow their cash value, while those that believe in the markets use just mutual funds. Some people that don’t believe in money managers can pick Index’s like the S&P 500 or Russell 2000 to grow their cash value.

So How does it work?

Every time you pay your premium, the money goes into the internal savings account. Depending on how you choose to grow you cash value, it will  earn“X”. The company will deduct costs to cover mortality, and administrative expenses, and whatever remains becomes your cash value. Every time you make a premium payment the process repeats itself. In the early years fees are typically higher because the insurance company is taking most of the risk, but over time the company returns those charges in forms of dividends and/or loyalty credits.

Your insurance needs and budget will have the biggest impact on which type of policy is best for you.

 

Health concerns

Don’t let a medical condition stop you from applying for life insurance! With advancements in medicine, diseases that may have been declined or postponed in the past now have the possibility of standard or even preferred rates. The only way to know for sure is to apply! I’ve listed some common health concerns we see every day.


These guidelines are constantly updated, but below you will see the best case scenario with a certain issue, and why someone would be declined.

  • High Blood pressure

Best case scenario: Stable, well-controlled. Blood Pressure 145/80 or less (150/90 ages > 60). No medication.

Possible decline if: Uncontrolled or untreated and Blood pressure over 165/100.

  • High Cholesterol

Best case scenario- Cholesterol 220 or less and ratio 5.0 – HDL > 35. Best class. Good family history. No hypertension.

Possible decline: Cholesterol over 400 or ratio greater than 11.

  • Diabetes

Best case: Adult onset Diabetes Type II age 50 or older. A1c less than 6.6. No related conditions or complications.

Possible decline: Poor control of diabetes and symptoms as evidenced by A1c levels greater than 9.0. Acute or chronic complications. 

History of not following treatment and/or making lifestyle adjustments.

 

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Please be advised that this is not intended as legal or tax advice. Accordingly, any tax information provided in this brochure is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed, and you should seek advice based on your particular circumstances from an independent tax advisor.