Permanent life insurance is a descriptive term for a group of policies designed to remain in force for the entire life of the insured. Most permanent life insurance policies (such as whole life, variable life or universal life) also feature a cash value account, and this unique combination of a lifetime insurance benefit and tax-deferred accumulation can be a very valuable asset in a comprehensive financial program. But making sure policyholders maximize the benefits from permanent life insurance requires some thoughtful planning and on-going management.
A significant practical challenge in maintaining a permanent life insurance policy is actually continuing to pay the premiums. In order to fully realize the possible benefits, a permanent life policy must remain in force. It is a long-term financial product, one designed to deliver greater returns later in its lifetime.
Although the comparison isn’t perfect, buying a permanent life insurance policy is analogous to taking out a mortgage, in that an amortized payment (the monthly mortgage or insurance premium) secures the ownership of a much larger asset (the real estate or the insurance death benefit). Eventually, the house is paid off or the insurance benefit is paid to the beneficiary, but in both a mortgage and permanent life insurance policy, early payments are proportionally weighted toward expenses and only later tip toward accumulation (home equity and cash value). In the case of a permanent life insurance policy, it may take 15-20 years for cash values to exceed total premiums paid, depending on dividends* paid or investment returns on the cash value. (Dividends are not guaranteed, and are declared annually by the insurance company’s board of directors.)
When deciding on the length of a mortgage, most consumers understand that a longer mortgage will mean lower payments, but also results in slower accumulation of equity. While the prevailing standard may be 30 years for a personal residence, many mortgage lenders will offer shorter and longer terms, allowing borrowers to tailor the mortgage to their personal preferences.
With permanent life insurance, the prevailing period of premium payments is the lifetime of the insured (hence, the term “whole life”). But consumers should know that, just like mortgages, other time periods are available for funding a permanent life insurance plan. Among the possibilities: 10-pay and 20-pay life insurance. Instead of planning to pay premiums for a lifetime, most life insurance companies offer policies that can be paid-up in shorter periods, such as 10 or 20 years. As with a mortgage, a shorter payment term means a larger outlay. But cash value accumulation will be accelerated as well. An illustration of projected values for a 10-pay policy will typically show cash values not only exceeding premiums paid at the end of the 10-year period, but often providing a rate of return comparable to other conservative, guaranteed investment choices.
Unscheduled paid-up additions.
This feature allows a policyholder to make irregular additional deposits to the policy, increasing both cash values and the total insurance benefit. Similar to extra principal payments that retire a mortgage early, unscheduled paid-up adds can be used to pay up a life insurance policy ahead of schedule. (Note: The IRS has strict guidelines on the tax treatment of cash values. Paying up a policy too fast might mean forfeiture of the tax advantages of cash values. Expert assistance is essential when using paid-up additions to shorten the period of payments.)
A life-long strategy
for keeping life insurance
For some consumers, one of the best ways to meet present needs for life insurance and maximize the long-term value of life insurance may be to purchase a large term insurance policy with generous conversion privileges. The conversion provision allows the policyholder to convert some or all of the existing term insurance to a permanent policy (or policies) at a later date (or dates) without requiring new underwriting. Depending on the terms of conversion, this switch to permanent coverage could occur all at once, or in several transactions over time, using one or more of the options listed above.
For those with a long-range financial vision, this strategy of buying term then converting is a cost-effective way to obtain a life insurance benefit now, and retain the option to maximize its value at a later date.
Elozor Preil is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at epreil_wagroupllc.com
By Elozor M. Preil