7 Reasons For Permanent Life Insurance

Life insurance comes in many different shapes and sizes, and I don’t blame you for being confused by it all. For the most part, there are two main types of life insurance - term and permanent. Term insurance provides coverage in the event of your death for a specified period of time (term), is the cheapest type of life insurance, and generally the most appropriate for individuals to purchase. Permanent insurance provides coverage in the event of your death for your entire life (permanent), is more expensive than term due to the longer coverage period, and isn’t as appropriate for most individuals as life insurance agents would like you to believe.

Having said that, there are a few instances when permanent life insurance (also known as Whole Life, Universal Life, or Variable Universal Life) is appropriate and can be a useful tool for achieving your financial goals. As with any major financial purchase, it is very important that you know exactly why you are purchasing this product, the specific amount that you need, and what is affordable for you.

1. Pay Estate Taxes

Life insurance proceeds are paid out to the beneficiary tax-free. If you are to pass away with an estate valued over $11,200,000 (in 2018), your heirs will have to pay an estate tax of 40% for assets above the exclusion amount. There are also state-specific estate tax limits to be aware of, which can increase the amount of tax owed at death. When structured properly, a permanent life insurance policy can pay this tax so that your heirs receive 100% of the value of your estate.

2. Liquidity At Death

If you own a business, farm, or other types of illiquid assets, a permanent life insurance policy can provide a lot of help in dividing up your estate at death. For instance, if you want to pass along the value of your estate equally to your three children, but the majority of your estate is held in private business ownership, you may have an issue. If one of the children has no interest (or ability to work) in the business, they can receive the cash from a life insurance policy in lieu of the business equity. There are a number of other ways permanent life insurance can ease the burden of “estate equality”.

3. Provide For A Disabled Heir

Special needs planning is a much more in depth subject than we can cover here today, but know that a life insurance policy can greatly help provide the funding needed to care for a disabled heir after you pass away. Just like for paying estate taxes, this type of situation needs to planned for carefully. The proceeds from a life insurance policy can be invested within a Trust and professionally managed, so that your disabled heir is properly cared for for years to come.

4. Key Man Insurance

Businesses have to abide by many different rules when trying to provide benefits and incentives to their key employees. The key “man” may be one of the owners, the head of a department, the top salesperson, or simply someone the company cannot afford to lose on short notice. The company can purchase a life insurance policy on this key person’s life - if the employee passes away suddenly, the company receives the death benefit. If the employee were to make it to retirement (alive), the cash value that accumulated in the life insurance policy over time can be paid out as an extra retirement benefit.

5. Charitable Trust

A Charitable Life Insurance Trust can be used for giving to charity and reducing the value of your estate. It works like this - the trust is the owner and beneficiary of a life insurance policy on your life. During your life, you make a gift to the trust so it can pay the life insurance premiums. After you pass, the trust receives the death benefit of the policy and will distribute the monies to the charities you have designated. This gives you a vehicle for receiving an income tax deduction today (gift to the trust), reducing your estate tax liability in the future (the policy isn’t owned by you), and a tax-free way to gift to a charity (leaving the rest of your estate to your heirs).

6. Asset Protection

Asset protection laws vary from state to state, but often times there are creditor protections for life insurance policies and their associated cash value. These laws can protect the value of the benefit paid out at your death or the cash value while you are still alive. If you are concerned that your assets may become subject to the claims of creditors, you should contact a local and experienced probate attorney.

7. Legacy

A permanent life insurance policy can be a good tool to use to plan your family legacy. When purchasing a permanent policy, be sure to inquire about the Internal Rate of Return at death. This calculation is based on the premiums you pay into the policy and the death benefit that is ultimately paid to your heirs at death. The younger you pass away, the higher the rate of return will be, as you will have paid in fewer premium dollars for the large death benefit. You never know when your time is going to come, so you want to look at the projected rate of return when you are in your late 80s or early 90s. You may come to find that you are comfortable with the rate of return compared to other investments, and use life insurance as a way to invest in your family’s future.