Why Life Insurance Matters
Author: Anthony Cippola
February, 2012 Issue
Critical decisions such as buying a home, getting married or having children require deliberate, thoughtful consideration. The outcome of any one of these decisions can irrevocably change your life. Delaying the purchase of life insurance following such a major life change can also be a costly mistake for you and your loved ones. Waiting just a few years can have a negative impact on several key areas of a life insurance policy.
Stay safe and secure
Although you’re healthy now, let’s say you decide to delay purchasing life insurance for five years. In that time, you may suffer an unexpected health condition that could place your insurability in jeopardy. In the worst-case scenario, if you were to die in the next five years without having purchased insurance, the cost of waiting would be the death benefit your beneficiaries would have otherwise received.
Term life insurance provides a generally income tax-free death benefit for a specific length of time. When the term expires, so does your protection. While you may be able to renew it, your health may have changed and, obviously, so will your age. This will make the rate higher, although term insurance may offer more affordable premiums initially.
In contrast, in permanent life insurance, premiums are at a guaranteed level and the policy remains in force as long as premiums are paid. Permanent life insurance premiums will likely be higher initially, but they’ll stay the same regardless of your age or health, and since it’s permanent insurance, the policy is more likely to be in force when your family needs it most.
Guaranteed cash value1
In its simplest form, permanent life insurance protects the people who depend on you for financial support—no matter what happens to you tomorrow. In addition to death benefit protection, permanent life insurance has a cash value accumulation component, which is sometimes referred to as “living benefits,” since it’s a benefit you can enjoy during your lifetime.
The cash value that builds in your policy accumulates tax-deferred and can be borrowed against, generally income tax-free2. That money can be accessed via policy loans for virtually anything from funding a child’s college education to supplementing your retirement income. It can also be used to buy a car or a new home, or to meet an emergency cash need. Or, if you’re a business owner, the cash value of permanent life insurance can be borrowed against to ensure the continuation of the business you’ve worked hard to build.
Some permanent life insurance policies, particularly those from mutual insurance companies, may be eligible for dividends that, although never guaranteed, may be used to help pay premiums or purchase additional insurance3. As a policyholder, you have several options for dividends use. For example, you can take dividend distributions in cash or apply dividends to add insurance coverage through the purchase of paid-up additional life insurance. Paid-up insurance is also eligible for dividends, has cash value and requires no additional premiums.
Since a portion of the premiums paid accumulates cash value each year, over the long term, cash value accumulation can be considerable, especially since taxes on the growth are deferred. Generally speaking, the sooner you start paying policy premiums, the faster your cash value may accumulate.
Now is the time
It’s always a good time to protect your family. But it’s even more important to make sure they’re protected when other assets can’t be counted on. Over the past few years, many people have seen the value of their assets decline. Yet the cash value of permanent life insurance is guaranteed to accumulate each year, regardless of what happens in the stock or real estate markets.
Those with a lower risk tolerance may be more concerned about a return of their money, rather than a return on their money. Many people appreciate the “value of consistency” that’s provided by whole life insurance as a diversification in their portfolio. Whole life offers guaranteed growth1. In a turbulent market, it’s possible that volatile assets—where gains are offset by losses—may grow to the same amount as assets that grow at a guaranteed fixed rate of return. That means you could get the same return without the uncertainty, headaches or sleepless nights. Given the turbulent market environment, doesn’t guaranteed growth just make sense?
A lifetime of protection
Having a lifetime of protection with permanent life insurance can guard you against many of life’s uncertainties. It will always be there when needed—during your lifetime and after. It can provide a source of cash while you’re alive and will preserve your family’s lifestyle upon your death. Additionally, knowing there’s a death benefit that will go to your beneficiaries when you die can give you the freedom to spend other assets while you’re living. That way, you can maintain your lifestyle in retirement and still leave a legacy to your beneficiaries.
Note: This educational, third-party article is being provided as a courtesy by Anthony Cipolla.
1Guarantees are backed by the claims-paying ability of the issuer.
2The cash value in a permanent life policy is accessed through policy loans, which accrue interest at the current rate, and cash withdrawals. Loans and withdrawals will decrease the available death benefit and cash value.
3Dividends are based on the policy’s applicable dividend scale, which is neither guaranteed nor an estimate of future results.
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