“Better to have it and not need it, than need it and not have it” – Franz Kafka
Permanent Life Insurance might be the best way to create multi-millionaires through your family’s generations. Permanent Life is different from Term Life Insurance – check out my article on Term Life here. First let’s discuss the characteristics of Permanent Life Insurance, then we will cover optional Endorsements, also known as Riders (some of these may be available on term policies), and finally we will cover a basic life insurance implementation strategy.
Permanent Life Insurance Characteristics: Many of these policies will have four main components:
- Face Value The initial amount of insurance you purchase and pay for
- Cash Account Many policies come with a pre-tax input option, money can grow tax-free, and can be used to maintain your insurance policy when the premiums become too expensive for you to pay the monthly balance yourself
- Premium Charge Your cost for maintaining the policy
- Beneficiaries Those who will receive the money when you pass away
*Similar to Term Insurance your cost may be affected by several health-related factors
Optional Endorsements Many times we see several additional options available for customizing your Life policy, including but not limited to:
Accidental Death Benefit In the event you die of an unexpected/unnatural cause, or sometimes lose a limb or eyesight, this rider can increase the face value up to double the amount of your policy (double indemnity).
Child Protection Benefit This can provide assistance with medical bills, even funeral expenses for your child if the unexpectedly have a qualifying health issue or pass away.
Cost of Living Benefit This can increase the face value of your policy at payout based on the difference in the cost of living from when you bought the policy to when the policy pays out. This is because $100,000 today might need to be $200,000 when your policy pays out.
Disability Waiver of Premium In the event you become disabled this waiver can guarantee your policy stays in force even when you aren’t able to make payments.
Disability Income Benefit This rider can compensate you in the event of a qualifying disability by paying a portion of your face amount to you per month while disabled, and/or by waiving your premium charge while disabled.
Family income Benefit This rider can provide a monthly payment to your beneficiaries for a certain period of time, and this may be in addition to the face amount of the policy depending on your insurance company.
Guaranteed Insurability This enables the policy owner to purchase additional life insurance while avoiding rate increases or denial due to health changes (excluding age).
Long-Term Care This pays out your life insurance while you are still alive, either in a lump sum or monthly installments, to cover qualifying long term care costs, usually associated with terminal illness.
Return of Premium Even many permanent policies have limits for what age they will last until. If the insured outlives their policy this endorsement returns the premiums paid to the insured, and this might be in addition to the face value of the policy.
In addition to your policy and endorsements is the Cash Account, which is like a savings account but better. You can build up your cash account simply by paying additional premium every month. Over time you may decide you have enough money in your cash account to justify eliminating one or several endorsements, and you can use your cash account in other ways as well. Here is an email I sent to one of my clients further explaining the Cash Account benefits:
Hello Mr. and Mrs. ____________,
Thank you again for reaching out! Here are the many benefits your cash account offers:
a.)Accrued Interest Currently your variable cash account is accruing interest at 8.9%! Not only is this far better than a savings account but this may qualify as tax-free earnings.
b.) Tax-Free Options Unless extenuating circumstances exist you can deposit pre-tax dollars into your cash account where they can grow tax-free, and can be used in one of two ways:
1b.) Tax-Free Borrowing You may be able to simply withdraw a portion of your money from your cash account check with your accountant as this might be considered taxable income), and/or you may be able to borrow against your cash account which is a 0% interest loan to you. In the event you unfortunately pass before the loan is repaid we often see the balance simply deducted from the total payout (because you received that money already).
2b.) Account Maintenance In the event you are unable to pay your monthly statement balance you may be able to designate your cash account to pay your monthly premium to maintain your policy.
c.) Additional Disbursement Lastly your cash account combines with your face value for a potentially tax-free disbursement to your beneficiary so this can be another way to grow an inheritance tax-free!
Thank you again and please don’t hesitate to reach out with additional questions. Happy Spring!
Strategy and Implementation:
When I start thinking about Life Insurance my first question is, “How much Life Insurance do I need now?” Your need may be based on these, and other items:
- Current debt
- how many years you want to replace or provide income to your beneficiary/s (the people receiving the face value when you die)
- how many years you want to have money available for you if you are disabled or terminally ill
- How much money you want to leave to your heirs
*Many advisors recommend planning to have living expenses covered to at least age 90
Let’s say you owe $150,000 on your house, and you want to leave $1,500/month to your spouse for 10 years after you pass away ($1,500 x 120 months = $180,000), you want to also make sure you will have this same amount available if you are disabled or terminally ill (so add another $180,000), and lets say you want to leave each of your grand children $100,000 so they can go to college and afford some personal expenses (so add $200,000)
150,000 (Mortgage) + 180,000 (spouse) + 180,000 (disability) + 200,000 (college expenses) = $710,000
Life insurance is usually sold in certain increments so you might need to apply for $750,000 face value. I recommend applying for an even higher amount because you can usually decrease the face amount before purchasing the policy but if you apply for less than you actually need you could run into a problem if your health changes and you need to apply for more insurance. So let’s say you apply for $1,000,000 to begin with. If you decide later you don’t need that amount you may be able to simply reduce the face amount and receive a subsequent discount on the cost.
This is the basics, if you have additional questions feel free to drop us a line!