The Case For Permanent Insurance
Published Monday, December 7, 2009 at: 7:00 AM EST
Term life insurance is like coverage to protect your car or pay medical bills. As long as you keep paying the premiums, you’re covered. With term life insurance, if you die while the policy’s in force, your beneficiaries will receive a specified payment. But there’s another kind of life insurance that may be preferable in some situations. Permanent insurance, also known cash value insurance, also requires premium payments. However, part of each payment builds the value of the policy, which remains in force throughout your life.
Although term insurance is generally less expensive than permanent insurance at first, if you keep renewing a term policy at progressively higher rates, it could eventually cost more than a permanent policy. If your need for life insurance will end—when the house is paid off, say, or when the kids are grown or your spouse has sufficient wealth to do without the income you provide—term insurance may be the way to go. However, if there will be a need for cash whenever you die—to create needed liquidity, help fund a succession plan at your business, or for another purpose—a permanent life policy may be preferable.
The extra expense of whole life insurance stems from your investment in the contract. Though much of each premium covers insurance costs, the rest goes into a kind of savings account. You own that account, which ultimately increases the value of your policy.
Permanent insurance comes in a variety of forms, with some enabling you to adjust premiums based on policy earnings, borrow against the policy, or pay off premiums in a lump sum or over a fixed period of time. And if you decide you no longer need a permanent policy, you can surrender it for its cash value.
Here are two situations in which permanent insurance may play a crucial role.
Estate planning. Creating liquidity at death is a tried-and-true use for life insurance, and with a permanent policy, you know it will be there when it’s needed. It can be employed for any of the following.
- To fund a “special needs” trust for a disabled or incapacitated child or relative who requires life-long care
- To provide cash for a surviving spouse if other assets—a home, business, or other property—don’t produce income
- To fund an irrevocable life insurance trust (ILIT). Though a life insurance death benefit isn’t taxed as income, it will be included in your taxable estate. A properly executed ILIT can pass along insurance proceeds to heirs without estate taxes.
- To generate cash to pay estate taxes
Business buyouts. For business owners, permanent insurance can provide reliable liquid assets to buy out a deceased owner. For example, your company could purchase a life policy on each owner. Then, if you die first, the death benefit paid to the business could be transferred to your heirs in exchange for your interest in the company.
Choosing a life insurance policy that protects your family and suits your financial situation can be tricky. Please give us a call if you’d like us to review your current coverage and see whether changes are needed.
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