What is Permanent Life Insurance?
Permanent Life insures you for the duration of your lifetime, and comes in various forms to fit your financial goals.
Whole Life Permanent Insurance: At a Glance
Whole Life policies cover you for your entire life, with fixed premiums that do not increase over time.
Whole Life policies accumulate cash over time that you can withdraw and borrow against while you are still alive
Whole Life policies are more expensive than Term Life but offer a tax-friendly way to accumulate money
A typical Whole Life policy for a 30-year-old male has a premium of around $200/per month
Cash value reaches the the death benefit when you turn 100 years old with more premiums going to cash value in the first 30 years of the policy.
Whole Life Insurance policies are what you typically think of when you talk about life insurance. As the name implies, a Whole Life policy insures you for the duration of your lifetime. As with all life insurance policies, when you pass away, your beneficiaries receive a tax-free death benefit in the amount that you purchased. Unlike Term Life insurance, however, Whole Life offers a cash accumulation vehicle that grows over time, much like a savings account. You withdraw funds from the cash accumulation while you are still alive and the taxes on this accumulation are deferred.
How Does Whole Life Insurance Work?
Let’s use an example. Sarah applies for a whole life policy with a death benefit of $500,000 dollars. The policy guarantees a minimum return of 2% on the cash value and her monthly premium is $200 dollars.
Every month, a portion of her premium is put into the cash value account while the rest is used to cover the cost of the insurance and the insurer’s fees and profits. Over the course of 25 years, the accumulated cash value is $80,000 dollars. Sarah, who is now 55, can choose to withdraw money from the cash value to help pay for her daughter’s college education. The money Sarah withdraws will be subtracted from the death benefit.
In the event of Sarah’s death, her beneficiaries will receive the $500,000 dollar death benefit minus any money withdrawn or borrowed from the cash value. Any remaining cash value will be returned to the insurer to cover expenses.
Who Should Purchase a Whole Life Policy?
Whole life insurance is not a perfect fit for everyone. In many cases, the cost of Whole Life is many times more expensive than a simpler, Term Life policy and greater gains can be had in other permanent policies such as Indexed Universal and Variable Universal policies.
With that said, for people who have maxed out their 401Ks, a Whole Life policy can be another safe tax harbor for their earnings and comes with zero risks. Whole Life policies can help fund retirement, can be used creatively to structure buyouts between business partners, and can substantially offset the costs associated with estate taxes for the heirs of large estates.
Is Whole Life Insurance Worth It?
Whole Life Insurance makes up nearly 35% of the policies held today. It is perfect for people who want permanent life insurance with fixed premium payments and a conservative cash accumulation component. While other forms of permanent life insurance such as Universal Life, Indexed Universal Life, and Variable Universal Life offer potentially higher returns on the cash value, the straight-forward nature of Whole Life has made it popular throughout time.
Speak to one of our experienced Whole Life Agents to find out which type of policy best fits your financial goals.
Indexed Universal Permanent Insurance: At a Glance
Indexed Universal Life Insurance (IUL) insures you for the duration of your life provided that you pay the monthly premiums
IUL policies have a cash accumulation vehicle that is indirectly tied to a market index such as the DOW, the S&P 500, and others
When the market gains, your cash value increases. If the market tanks, your gains are stopped at 0% meaning you do not lose cash value
IUL policies differ slightly from other types of life insurance in that gains in cash value are tax-free as opposed to simply tax-deferred
A $250,000 dollar policy for a healthy, 30-year-old costs between $96 and $120 dollars per month
Indexed Universal Life Insurance acts as both a traditional life insurance policy and a safe investment vehicle for people who want their premiums to earn money as the stock market indexes rise over time. While certainly more complex than Term or Whole Life insurance, Indexed Universal Life insurance shines as a safe harbor to put your money while still protecting the financial future of your loved ones in the event that you pass away.
How Does Indexed Universal Life Insurance Work?
With an IUL policy, you determine how much coverage you want (i.e. the amount of money paid to your beneficiaries when you die) and the market index that you want your cash accumulation vehicle to mirror (the Dow Jones Industrial Average, the S&P 500, or others). The policy centers around 3 terms.
Participation Rate: This is the rate at which the portion of your premium that mirrors the index realizes gains in the market. For instance, if you have a participation rate of 80% and the market jumps 10%, the portion of your premiums that are tied to the market will realize gains of 80% of the market gains. The rest of the gains stays with the insurance company as profit.
Cap: The cap is also set in the policy. The cap represents the amount of gains your cash accumulation can make with the market. For example, if the cap is set at 10% and the market jumps 12%, your gains are capped at 10% and the remaining 2% goes to the insurance company as profit.
Market Floor: The floor represents the amount of losses the market can sustain without affecting your cash accumulation. The floor is set at 0% which means that if the market experiences turbulence and loses 2%, you will not fall with the market but instead realize no gains for that period. Essentially, this ensures that your cash can thrive with the market, but not dive with the market. No pain, all gain.
How Much of My Premium Goes Towards the Cash Value?
With an IUL policy, much like a Whole Life policy, a portion of your premium goes towards the cash accumulation vehicle. The difference with an IUL policy, however, is that you are able to contribute more to the cash value beyond your premium. While there are limits in other retirement investments (such as your 401K), with an IUL the limit is set only by the insurer. Essentially, you can contribute as much as you want on top of your premium to the cash value/accumulation aspect of your policy.
Is Indexed Universal Insurance Worth It?
Indexed Universal Life insurance is an excellent, risk-free way to accumulate cash value over time while still enjoying the peace of mind that traditional life insurance provides. While premiums will vary depending on health, age, and other factors, they are comparable to other permanent life insurance policies but offer an opportunity to build up substantial tax-friendly cash for retirement or other life events. Overall, if you can afford the premiums, an IUL policy represents a comfortable middle ground between the fixed gains of Whole Life while eliminating the risk associated with Variable Life policies.
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