What to Know After Buying Permanent Life and Disability Insurance

With permanent life insurance and disability insurance as part of your financial plan, you can feel confident that you’re well on the way to financial security. Why? Because disability and life insurance protect your lifetime income, which is an incredibly valuable asset. What’s more, your permanent life insurance accumulates cash value, which serves as a stable asset that grows in a tax-advantaged way and can help you reach multiple goals throughout your life.

YOU’RE ON YOUR WAY TO FINANCIAL SECURITY

A financial plan is about identifying goals and then setting aside some money each month to help you achieve them. Financial security is knowing that even if something goes wrong your family can still reach the goals you outlined in your plan. Lose your job? You’ll have emergency funds for that. If you become disabled, your disability insurance will help you make up lost income. If you die, there will be money for your family.

With permanent life insurance, you’ll accumulate cash value that can plug into various parts of your financial plan. The money grows in a tax-advantaged way, and accessing it is easy and flexible. You could eventually use cash value for emergency funds, to help pay for college, or even to weather down markets in retirement. Permanent life insurance is a financial product that is flexible enough to help you efficiently meet many goals. It’s yet another layer of financial security for your plan.

SOME THINGS TO KNOW ABOUT YOUR PERMANENT LIFE INSURANCE

Because permanent insurance is such a flexible financial product, it can be a little more difficult to understand than a financial tool that’s only meant for one thing. Here are a few things to know about your insurance.

Your policy will pay a death benefit. One of the key benefits of permanent insurance is that it will pay a death benefit. Permanent insurance never expires. That means if everything goes to plan, it may not pay the death benefit until you have great grandchildren many years from now. It can be a legacy — money you plan to leave behind for your family.

How your policy grows over time. Over time, permanent life insurance can become one of the best assets you own. But permanent life insurance is a long-term product. Initially, you will pay more into your policy than your cash value will be worth. But when you let your policy grow over many years and if you choose to reinvest dividends¹ in your policy, the accumulated cash value and death benefit of your permanent life insurance policy is likely to grow to be worth far more than what you pay in. That value has tax advantages. In addition, if you have whole life insurance, because it is not correlated to the stock market, your cash value will be more stable than market-based investments.

You could make future changes to coverage. Your permanent life insurance is likely well-suited to your situation today, but as your needs change over time, your life insurance can change with you. Depending on your policy, you may be able to add to it, change it to paid-up insurance (reducing your death benefit, but ending the premiums you owe) or make other changes. You should also regularly review your beneficiaries to make sure the death benefit will go to the right people (beneficiaries trump what’s in a will — so it’s important to make sure they’re up to date).

Accessing your cash value. Once you have accumulated cash value in your permanent life insurance policy, you can access the value in a couple ways.

• Take a loan from the life insurance company. This is a quick and easy way to get access to cash (you can typically get funds in a day or two). Repayment is flexible too. However, you will owe interest on funds that you borrow, and your death benefit will be reduced by the amount of your loan. Here are a few additional things to know when taking a loan against your life insurance.
• Use your policy for a bank loan. You could also take a loan from your bank with your policy as collateral. Having the policy as collateral might get you better rates at a bank than you could otherwise get, and it will keep your policy fully intact while you repay the bank loan.
• Surrender a portion or all of your policy. You can surrender a portion or all of your policy and take out your cash value. This is typically a last resort, because after surrendering your policy, you cannot reinstate your insurance. You would have to start the process over to get a new life insurance policy if you need life insurance in the future. In addition, any gain in policy value over the basis you pay in to the policy would most likely be taxable as ordinary income.

When you access cash value, it’s a good idea to talk to your financial professional, as he or she can help you find the best solution based on your specific situation.

SOME THINGS TO KNOW ABOUT YOUR DISABILITY INCOME INSURANCE POLICY

Disability income insurance tends to be straightforward. If you are sick or hurt and can’t work, your policy will pay you a monthly benefit. But here are a few things to know if you ever need to use it.

What counts as a disability? Disability insurance covers you when an injury or illness prevents you from working, and health reasons are more common than you might think. Musculoskeletal and connective tissue disorders, along with cancer, account for roughly 40 percent of new long-term disability insurance claims. Heart conditions, injuries and some mental illnesses are also covered via long-term disability.

What if I can do some, but not all, of my work tasks? Disability claims aren’t always all or nothing. There are frequently cases where someone can still work, but in a reduced capacity. In such a case, that person may be eligible to file a partial disability claim, which would replace a portion of lost income.

What’s the difference between short- and long-term disability? Short-term disability (typically offered through your employer) will cover you in the initial weeks and months of your disability. Long-term disability insurance covers you if your disability lasts for more than a few months.

Be aware of your coverage when you change jobs. Many people get some disability insurance through work. It’s a great benefit. But there can be a few drawbacks. One, most work policies only cover a portion of your income, perhaps 60 percent. In addition, if you change jobs, you may lose the coverage you have through work. With a private policy that you purchase on your own, you don’t have to worry about losing your coverage when you change jobs.

What’s the benefit waiting period? For long-term disability, this is how long you’ll have to wait before your benefits kick in. Let’s say you become disabled on March 1. If your policy has a 90-day waiting period, your benefits will start 90 days later, just before June 1. Short-term disability is designed to cover your costs prior to long-term benefits kicking in.

Your monthly benefit. Once your policy begins paying benefits, this is the maximum amount that you’ll get each month until you are no longer disabled, or when you reach your maximum benefit period (typically in your 60s).

YOU SHOULD FEEL GOOD ABOUT YOUR FINANCIAL SECURITY

When combined with a solid emergency fund, investments and estate planning, permanent life insurance and disability insurance are essential building blocks of a resilient financial plan. The pieces all come together to help you efficiently accumulate funds for future goals, while protecting you from risks that could derail a financial plan.

¹Dividends are not guaranteed.

Utilizing the accumulated value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event.