What to Know After You Get Your First Permanent Life Insurance Policy

By adding permanent life insurance to your financial plan, you’ve taken a major step toward financial security. That’s because permanent life insurance can become one of the most flexible financial assets that you own.

At a minimum, as long as you keep your policy in place, your beneficiaries are guaranteed to get a death benefit someday. But you have also added a tax-advantaged asset to your financial plan that can help you weather market downturns in retirement, pay for college or other goals, or just give you peace of mind that once cash value has built up, you’ll have an easy way to access cash should you ever need it.

Protecting your family today, growing funds for the future and leaving a legacy — permanent life insurance can help you with so many goals. Here are a few things you should know about permanent life insurance.

WHY PERMANENT LIFE INSURANCE IS AN IMPORTANT PART OF A FINANCIAL PLAN

The death benefit of life insurance is foundational for your family’s financial plan. That’s because the plan depends on income in order to save for the goals in it — like retirement, education or a big home renovation.

But you can get a death benefit at a lower price with term insurance, so why go with permanent life insurance? Permanent life insurance provides a death benefit for today but also becomes a utility player in your financial life. While you could save for college with a 529 plan, save for retirement with a 401(k) or use term insurance for a death benefit, those financial vehicles are only good for that single goal. If you want to use money you’ve saved in a 401(k) to pay for college, you’re probably going to pay a penalty and owe taxes. The same is true if you don’t use the money in a 529 for college. That’s not to say that you shouldn’t use those accounts to your advantage — you should. But your permanent life insurance will be the one financial product that is flexible enough to help you meet any of those goals.

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. The money you pay for your insurance covers both the expense of insuring you and your cash value. 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. And that value has tax advantages and 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 few 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.
• 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.

YOU’RE WELL ON YOUR WAY TO FINANCIAL SECURITY

Permanent life insurance is the bedrock of a solid financial plan. It will grow with you over time. It’s the one financial product that enjoys tax-advantaged growth, stability and can be flexible enough to help you meet so many financial needs. That’s probably why so many people who have had permanent life insurance over the long term say they wish they had bought more.

¹Dividends are not guaranteed.