There are two types of life insurance: permanent life and term lifePermanent life insurance has a death benefit for your beneficiaries and one money value that you can use during your lifetime and never expires. Term life insurance also has a death benefit, but there is no cash value and your policy will expire after a certain amount of time.
The difference between a life insurance policy and a permanent life insurance policy is similar to the difference between renting an apartment and owning a home. When you rent, you have a lease for a specific term. Once that lease is over, you can renew it, but most likely with a rent increase. Likewise, term life insurance lasts for a period of time, and when it expires you can reapply for coverage, but premiums will most likely increase as you age and your health deteriorates.
Term life insurance is the most affordable option because it is not money value and it expires. If you want a policy with a cash value that grows over time, look at permanent life insurance.
Cash value is a unique property permanent life insuranceWhile the term ‘whole life insurance’ is often used synonymously with permanent life insurance, whole life universal life, and variable lifespan are actually species of permanent life insurance. Other permanent life insurance policies are a variation of these three products.
All permanent life insurance policies have a cash value that grows on a tax-deferred basis. You can take out a loan at its cash value or use it as collateral during your lifetime, tax-deferred. That is why permanent life insurance is considerably more expensive than term life insurance. The exact costs depend on the type of permanent life insurance policy you choose: very universal variable guaranteed universal indexed universal, and variably universal.
The early years of permanent life insurance are expensive compared to what you will pay in the future. “In the early years of overpayments, the cash value in the policy earns interest, and you use that bucket of money to offset insurance costs when you’re older,” said Mark Williams, CEO of Brokers International
The big difference between the types of permanent life insurance policies is how they manage the cash value – in the insurance company’s portfolio, the stock market, or annuities.
You can use the money value of a permanent life insurance policy during your lifetime, for things like paying your kids’ college tuition, financing a business, or buying a second home. Most people use the cash value to finance their money retirement – pay themselves a monthly income when they stop working. Because of these characteristics, permanent life insurance can function as an investment as well resource for wealth building
One reason people get permanent life insurance is because of its cash value and the ability to get tax-free loans without using other assets as collateral. It can be used to pay for children’s tuition, finance a business, or buy a second home.
If you borrow money or a loan you do not pay tax on the loan for the cash value of your permanent life insurance, but you do pay interest. The interest you pay is based on the current market rate and can be fixed or variable, depending on the type of permanent life insurance policy you have.
What if you don’t pay back a loan on your permanent life insurance policy?
Williams said you can pay back the loan – or never pay it back, and keep the policy until you die. However, he noted that if you die with an outstanding loan, the insurance company will reduce the death benefit payable to your beneficiaries by the outstanding amount of the loan.
If you have sufficient cash value or dividends on your policy, you can use the dividends to repay the loan, depending on the type of permanent life insurance product you have.
If you want to cancel your life insurance policy and you have taken out a loan that you have not repaid, you should contact your insurance company to start the process. The money you get back if you cancel a permanent life insurance policy is called cash surrender value
If you cancel your insurance while you still have a loan, you will receive the cash value minus the outstanding balance of the loan and any costs associated with canceling your policy. You must also pay tax on the cash value received. Consult an accountant or tax specialist about the tax implications before purchasing your permanent life insurance policy.
Before taking out a loan, consult an expert for your cash value life insurance policy
Permanent life insurance is more than just benefits for your beneficiaries. It’s an opportunity to build wealth and fund your retirement with the cash value that your policy builds. If you are considering taking out a loan against your permanent life insurance policy, consult an accountant and Financial Advisor first.
You want to understand all the tax implications, the impact on your death benefits if you don’t repay the loan, and how other assets are protected. This decision cannot be made in a vacuum, as everyone’s needs differ. By engaging an accountant and financial advisor, you can avoid making a decision that is not financially sound or beneficial for you.
Wealthy individuals – those with at least $ 1 million in cash – often have permanent life insurance for tax breaks, endowments, and endowments. The cost is significantly higher than term life insurance because permanent life insurance is also a wealth-building tool.
The average person may not be able to afford a $ 1 million permanent life insurance policy. Think of permanent life insurance coverage as equity in a home. You may not be able to get your dream home right away, but you can get a starter home that will also help you build wealth. Start with permanent life insurance with a smaller death benefit and increase it over time. And if you can’t afford permanent life insurance, get a term life insurance policy converted into a permanent policy
Williams also proposes one combination of permanent and term insurance policiesFor example, if you have $ 200,000 in permanent life and $ 300,000 in term for 20 years, at the end of 20 years, the term life insurance will disappear, but you still have your $ 200,000 permanent policy that has earned cash value.
If you are considering permanent life insurance, it is wise to consult an accountant and financial advisor to determine which policy is best for you and what the tax benefits and implications are. It’s worth taking the time to find the best policy for you because once you’ve signed on the dotted line it’s a lot harder to make changes if you need to adjust your coverage.
Ronda Lee is an insurance associate editor at Personal Finance Insider and covers life, auto, homeowner and renter insurance for consumers. She is also a licensed attorney who has practiced litigation and insurance law.
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