While term (or temporary) life insurance offers insurance coverage with the lowest monthly outlay when we are young, permanent (or cash value) life insurance is usually the lowest cost over our lifetime. In addition, cash value life insurance can be an important part of your retirement plan as you can use that insurance for retirement income.
Cash value life insurance comes in several forms, but they all have common features; the insurance will not expire as long as you pay your premiums and they build up a cash value on a tax deferred basis that can be accessed during your life time. In fact, you can access that cash value tax free, for any reason, by “borrowing” the cash from your policy. In this case, you become the banker. You must charge yourself a reasonable interest for borrowing the funds. If you choose not to pay back the borrowed funds, then the amount borrowed plus the interest is deducted from your death benefit when you die. Either way, you can use the cash value in your insurance for retirement income.
The first question we are asked when describing these features is “Is that legal?” Followed by “Does the IRS know about this?” The two cut outs below are from a report by the GAO (United States General Accounting Office) in their report to the Committee on Finance, US Senate and the Committee on Ways and Means, US House of Representatives back in 1990.
Let’s look at a hypothetical example. Peter, a 30-year old male in decent health buys a $500,000 cash value life insurance policy to protect his family against premature death. He pays $200 per month for the coverage. By the time Peter is 65-years old and ready to retire, his insurance policy cash value has grown to $250,000. As part of his retirement plan, Peter borrows $200,000 from his policy so he and his wife can travel the world, live free of credit card debt and make the most of their retirement. Over time, the amount of interest Peter charges himself on his loan amounts to $20,000. By age 75 Peter passes away, leaving his wife as beneficiary. His wife receives the death benefit of $500,000 minus the $200,000 borrowed and $20,000 in interest, for a total tax free death benefit of $280,000.
Of course, Peter did not have to wait for retirement to borrow money from his insurance policy. He could borrow those funds at any time, for any reason. He could use it to help pay for his children’s college tuition, it could be used as a financial cushion if he is ever laid off or unable to work, or just to go on a well-deserved vacation. The choice is his, and he can be confident that the funds are available for him to borrow tax-free.
It may also be important to note that you can build your life insurance cash value in addition to maximizing a 401(k) or other retirement plan. In fact, life insurance is often used for that reason by individuals who wish to put more money away than what is allowed in other retirement plans. By using life insurance for retirement income you can maximize your savings potential.
Even more, with the new living benefit life insurance you have an additional feature that will allow your life insurance policy to also double as a long-term care policy. Thus, one life-insurance policy can 1) protect your family from the financial consequences of your premature death, 2) provide for or enhance your retirement security with a tax-free income, and 3) protect your and your family’s quality of life in the case of cancer, heart attack, stroke or any major critical, chronic or terminal illness and still use your insurance for retirement income.
One final point that is important. We are often asked about the quality of return of cash value life insurance policies. The question is usually articulated as “Isn’t the return on cash value life insurance really poor?” The answer? Life insurance is not meant to be an investment, but the returns on cash value life insurance can compete with any investment vehicle out there. There are many different types of cash value life insurance. In general they fall into to two categories; fixed or variable. In a variable life insurance policy, the return is your risk. You bear the financial responsibility for your investment performance, and you can lose money. In a fixed life insurance policy, the responsibility of investment performance is on the insurance company. The same can be said of fixed versus variable annuities, another life insurance product.
One of the most popular cash value insurance policies is the fixed Indexed Universal Life Policy. Fixed Indexed Universal Life allows you to participate in a percentage of the upside of the stock market, without ever experiencing a losing year. That means your money grows when the stock market produces a positive years, but you are contractually guaranteed to never lose money. So when the stock market has a losing year, your portfolio value stays the same. When I used to teach investment courses, we stressed that the first rule for accumulating wealth is keep losses small. It’s a mathematical fact that you can be successful in almost any system as long as losses are minimal. This life insurance policy contractually guarantees just that. The image below shows what your returns in an Indexed Universal Life would have looked like since 1998 vs. the S&P 500 Index.
Notice that when the stock market index declined, the life insurance cash value did not. When you are contractually guaranteed not to lose money you no-longer worry about the stock market’s ups and downs. The portfolio risk is no longer yours to worry about, the insurance company has taken the risk off your shoulders. That’s what insurance is supposed to do.
If you would like to see what cash value insurance can do for you and your family, request a quote from our web site. See how easy it is to use insurance for retirement income. We will provide a detailed illustration of projected and guaranteed cash value, along with details on the living benefit life insurance provisions. the most commonly used cash value insurance policies include whole life insurance and universal life insurance. An indepndant agent will help you find the best life insurance rates from multiple insurance companies. With the right information you are best able to make the right decision for you, your future and your family’s protection. Call 800-847-9680 or fill out this form for a life insurance quote today.
Shield Insurance Solutions is independent. Our goal is to find the best insurance company and policy for you. We specialize in living benefit life insurance and work with nearly 100 different insurance companies in order to find the right policy at the right value for you. We are transparent and have been in the financial services industry since 1984. Our life products include Whole Life, Universal Life and Term Insurance and Mortgage Protection Insurance. As independent agents, we work hard to find the best life insurance company for you, with the best life insurance rates and value. We are based in Jupiter and Palm Beach Florida and licensed in almost every state. If you are shopping for a life insurance quote, we can show you what many of the top insurance companies will offer. The price differences will amaze you. Visit www.ShieldInsuranceSolutions.com to get a free life insurance quote comparison, or call us at (800) 847-9680.