So you’ve decided to purchase life insurance. That could be a wise decision. Life insurance is a powerful financial tool that can provide critical protection for your spouse, children and other loved ones. In the event of your death, your family can use a life insurance death benefit to pay off debt, replace your income and fund major life goals.
Not all life insurance is the same, though. There are many different types of insurance, but most fall into one of two categories: term or permanent. Term insurance is coverage that lasts for a limited period of time, like 10 or 20 years. When the period is over, you can renew the coverage or simply let it lapse. Term insurance is popular because it’s usually affordable compared with similar permanent coverage.
However, affordability shouldn’t be your only consideration. While permanent insurance may come with higher premiums, it also has different features and benefits that usually aren’t available with term policies. Below are four such features:
The coverage lasts forever.
As the name suggests, permanent coverage is meant to cover your entire life. Some policies terminate at age 100, at which point the cash value is simply paid out to you. Assuming you don’t live past age 100 and continue to pay all required premiums, however, your coverage will stay in effect.
That could be important later in life. As you get older, you may experience more health issues. If you need insurance in the future, you may find that the premiums are prohibitive or that you don’t qualify for coverage at all. If you buy a permanent policy today, you only go through underwriting one time and the coverage stays in force forever.
You get tax-deferred growth.
A key difference between term insurance and permanent insurance is the accumulation of cash inside the policy. Permanent policies have a cash value account. A portion of your premium goes into this account. It then grows—through policy dividends, interest payments or investment gains. The method for growth depends on the type of policy.
Growth inside a permanent policy is tax-deferred. That means you don’t pay taxes on the growth until after you take a distribution from the policy. That deferral could help your funds accumulate at a faster rate than they would in a taxable account.
You can use the cash value to generate tax-efficient income.
What do you do with the cash value in a permanent policy? You can let it continue to accumulate, or you can take it out to fund college, retirement or any other goal.
You can take the funds as withdrawals, which may generate tax consequences. But you can also take the loan distributions. Under this arrangement, you borrow the funds tax-free from the policy, and then repay it over time. If you fail to repay the loan before you pass away, the balance is simply deducted from the death benefit.
The policy can generate accelerated benefits.
Many permanent policies also offer something called “accelerated benefits.” These are options to take your death benefit while you’re still alive. This option typically is only available if you’re diagnosed with a terminal illness. While it’s an option most people hope to never use, it could be valuable to help you and your family pay for your care and comfort.
Ready to develop your life insurance protection strategy? Let’s talk about it. Contact us today at Thomas Financial. We can help you analyze your needs and create a plan. Let’s connect soon and start the conversation.
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16920 - 2017/8/25
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