Is Permanent Life Insurance Worth It?

The main goal of saving money is to achieve specific long-term goals, such as buying a house, funding your children’s education or retiring comfortably. While it’s easy to understand the need to focus on your savings goals, it’s important to remember that the best financial goals are protected financial goals. If you or your spouse were to pass away, what would happen to your savings?

A focus solely on savings goals without considering financial protection can leave you vulnerable to significant financial losses. By incorporating life insurance into your financial strategy, you can help protect your and your loved one’s financial well-being over the long term. This article will help you understand the role different types of life insurance can play in your financial strategy, and help you decide if permanent life insurance is worth it.

Life insurance is a crucial part of financial protection

Income replacement: Life insurance provides a generally tax-free payment to beneficiaries (the person or entity named to receive the payment) upon your death. This payout can replace lost income, ensuring that loved ones can support their standard of living and meet financial obligations, such as mortgage payments, tuition and daily expenses.

Debt repayment: Life insurance proceeds can be used to settle outstanding debts, such as mortgages, personal loans or credit card balances. This prevents surviving family members from inheriting financial burdens.

Estate planning: Life insurance can help the transfer of wealth to heirs and beneficiaries by providing liquidity to cover estate taxes, probate fees and other expenses associated with estate settlement. This ensures that assets are distributed according to your wishes and can help preserve the family’s financial legacy.

What are your options?

Term life insurance
You may have heard that a term life insurance policy generally costs less. That’s true if you have protection needs for a set period. Term insurance protects your loved ones only for the number of years you choose. Typically, a term is 10 to 30 years. The premium is guaranteed1 not to change for the length of the term.

At the end of a policy term, you have these options if you still need life insurance:

• Renew the policy every year. The insurance company typically guarantees the policy’s annual renewal without requiring a new medical exam or underwriting, regardless of any changes in your health. The premiums for annual renewable term insurance start out lower than those for permanent life insurance policies like whole life or universal life. However, premiums increase each year as you age and the risk of death increases.
• Buy a new policy. Depending on your age, you can also buy a new policy with new exams and underwriting. Your premiums will be higher because you’ll be older. Any changes in your health will also affect your rate or perhaps make you unable to qualify for a new policy.
  
• Convert your policy. Another choice is converting your term policy to a permanent policy during your conversion period, without any exams or underwriting. Depending on the guidelines outlined in your term policy, there may be limitations on when you can convert and the policy you can convert to.

Permanent life insurance
Permanent life insurance is designed to protect for a lifetime. Like its name, it’s permanent. Your coverage doesn’t end like a term policy. It generally has a higher premium than a term policy. Permanent policies also build cash value, which can be accessed if needed.2 They also typically offer an accelerated death benefit rider, which provides you with a portion of your death benefit if you’re diagnosed with a serious illness. These added features may make permanent life insurance worth it.

Check out Permanent Life Insurance Versus Term Life Insurance to learn more about the differences.

Identifying multiple needs

This hypothetical example shows how life insurance can help meet several different goals. Heather is 45 and a single mom. She knows she’s behind in saving for retirement. The only savings she has is about $100,000 in her 401(k) plan and a $10,000 emergency fund in her savings account. Her goal is to continue to contribute the maximum allowed to the 401(k) each year. Heather also understands that she doesn’t have enough life insurance. She’s considering buying a $1 million 30-year-term policy. She feels that would be the least expensive way to get coverage for as long as she needs it. What she saves in insurance she can put towards saving for retirement.

Heather meets with her financial professional to discuss her options. Her financial professional asks her if she’s thought about how far her emergency fund would really stretch if something major were to happen. What would happen to her finances if she were diagnosed with a serious illness? What would she do if her needs changed and she needed life insurance for longer than 30 years?

Heather has never given much thought to the impact an illness could have. She makes a decent living but worries that it may not be enough. And who knows? She might want to move to a new house at some point, and then she’ll have a whole new mortgage to think about. All she knows is that she doesn’t want to become a burden to her daughter later in life.

Different policies support different needs

Once Heather’s daughter is grown, her life insurance need will drop from $1 million to $500,000. Heather decides to buy both a 30-year term and a permanent life insurance policy, both for $500,000. Together, they will provide the desired death benefit while Heather raises her daughter and pays off her mortgage, while keeping the cost of the insurance more affordable. After thirty years, the term policy coverage will end, but she will still have the permanent policy for $500,000.

The cash value of the permanent policy will have grown over those 30 years. She can use it to supplement her retirement needs. Cash value within the policy grows tax-deferred, and she would be able to access that cash value at any time through policy loans. She wouldn’t have to pay taxes on the loans unless the policy lapses.2 The tax treatment of loans is a powerful choice to have at retirement, offsetting what might be lost to taxes from her other retirement savings.

Heather also likes the accelerated death benefit rider that gives her and her daughter more financial protection. Now, if she experiences a serious illness, she can access a part of the death benefit to help pay for her care.

Learn more about options to help you pay for a serious illness in retirement in our blog.

Consider your options

As you build your financial portfolio, it’s important to recognize that buying a combination of different types of policies can help meet your needs. Not only does life insurance provide a valuable death benefit, it can also help you use your assets more efficiently, whether it’s protecting your financial future, transferring wealth or supplementing income. Consult with a financial professional to customize a strategy just right for you.

Sources and References:
¹Guarantees are based on the claims paying ability of the issuing company.
²Loans and withdrawals will reduce the policy’s death benefit and available cash value. Excessive loans or withdrawals may cause the policy to lapse. Unpaid loans are treated as a distribution for tax purposes and may result in taxable income.