How is permanent life insurance like a Swiss Army Knife?
Dave Simbro is a senior vice-president for Northwestern Mutual, and he compares permanent life insurance, like whole or universal life, to a Swiss Army knife because there are so many ways to pull money out. Insurance is not supposed to be considered an investment, but it might be fair to compare it to a piggy bank. When compared to things that are investments, like stocks or bank certificates of deposits, stashing cash in a whole or universal life insurance policy might also have some serious tax advantages.
The Two Parts of Permanent Life Insurance: Death Benefit and Cash Account
- The death benefit, or face amount, is the proceeds of the policy that goes to beneficiaries when the insured person passes away.
- The cash account represents a store of money that might accumulate from premiums paid to the insurer or a return rate from existing funds in the cash account.
- Within the cash account, it is also important to consider the base and the growth.
How Can You Cash Out Permanent Policies in a Tax-Advantaged Way?
There are a few ways that your policy can help with taxes, and you can even use some of these while you are still alive.
Death benefit: After you pass away, your heirs get cash. Normally, this is not a taxable event, so your beneficiaries get tax-free money.
Borrow from the cash account: You can take out a loan against the value of your cash account, and you are not taxed on loans. Normally, you will get charged a modest interest rate because you are essentially borrowing from yourself. If you never get around to paying yourself back, it might reduce the death benefit.
Withdrawals: If you take money out of your cash account, you are only taxed if you take out more money than you put it into the account. In other words, you are note taxed on the base but only on the growth. Note that if you leave money in your cash account, the growth can accumulate without getting taxed.
Conversions: You are allowed to convert your whole or universal life policy into an annuity, long term care insurance, or new life insurance with a long term care provision without paying any taxes at that time.
How Else Can You Benefit from Permanent Life Insurance?
There may be some other advantages to a universal or whole life insurance policy to consider. And yes, we know that term is cheaper.
- Senior life settlements: Seniors can sell permanent policies in a senior life settlement for some percentage of the face value, which is likely to be greater than the cash account.
- Lifetime insurance: Permanent policies, unlike term, stay in force as long as they are paid for or paid up to provide a lifetime of coverage.
Should You Buy Permanent Life Insurance?
Term policies are cheaper, but they may lack some of the advantages of whole and universal life. Many insurers do offer no exam term life up to age 65, and they offer fully underwritten life insurance to 70 or 75. Even if a senior citizen cannot find 30 year term, he or she might find 10 year term at affordable rates. However, if that senior citizen outlives her life insurance, and the insurer is betting she will or they wouldn’t offer coverage, there is nothing left in a term policy. That is not true of permanent policies that can grow a cash value that can get used as an asset, get sold in senior life settlements, and provide a lifetime death benefit.
