 Personal Finance PowerPoint Presentation Permanent Life Insurance Prepare to get financially fit by practicing personal finance. Insurance is part of our long-term risk mitigation strategy where we follow the adage of measure twice, cut once, put in a formal process in place, look in something like set the goals, develop a plan to reach them, put the plan in action, review the results and repeat the process periodically. Most of this information can be found at Investopedia Permanent Life Insurance which you can find online. Take a look at the references, resources, continue your research from there. This by Julia Kagan updated May 25, 2022. In prior presentations we looked at insurance in general. We're now moving into the life insurance. We've talked about different kinds of life insurance. The major two categories you want to be keeping in mind being the term life insurance and then the permanent life insurance. The term life insurance being classical or pure life insurance where you'll often hear the adage of you should buy the term life insurance and then invest the difference because it's usually cheaper, which is usually a good line and it's one that I would follow or at least have to argue against. Meaning if I'm going to be purchasing something other than term life insurance I need to have a rationale other that will be able to argue against that rationale of I should just buy term and then invest the difference such as you might have different needs in terms of how long you're going to be basically needing the policy. You might have investment needs and investment strategies, retirement strategies, estate strategies which may be compounded or in addition to simply the pure life insurance that you might be purchasing. Okay, so let's stick into it. What is permanent life insurance? Permanent life insurance is an umbrella term for life insurance policies that do not expire. So obviously when we go from the term life insurance that's going to be more pure life insurance straightforward. When we get to the permanent life insurance, those are the items that don't expire. They're going to be permanent, but there's variance within different kinds of permanent life insurance. So the tree of thought process you're thinking of is term versus permanent. If you go into the permanent side of things, then you could start to think about different types of insurance plans under that tree, under that branch. The two primary types of permanent life insurance are whole life and universal life. And most permanent life insurance combines a death benefit with a savings portion. So whole life insurance offers coverage for the full lifetime of the insured and its savings can grow at a guaranteed rate. Universal life insurance also offers a savings element in addition to a death benefit, but it features different types of premium structures and earns based on market performance. Once you've picked the policy that's right for you, remember to research the firms you're considering thoroughly to insure you'll get the best life insurance available. So you want to think about what your plan is first, then look at the insurance companies that are going to be aligning to that plan, noting that if you're talking to salespeople or agents of an insurance company, they might be gearing you towards more complex plans if they're going to be making a commission from it, which may or may not be appropriate for you, but you want to make sure that you're doing your kind of your own research and then going into these plans and these negotiations with that research as your guide. Understanding permanent life insurance, unlike term life insurance, which promises the payment of a specified death benefit for a specified period of years, permanent life insurance lasts the lifetime of the insured, hence the name, unless non-payment of the premium causes the policy to lapse. So obviously if you don't pay the premiums, then you're going to have a problem with the life policy. Permanent life insurance premiums go toward both maintaining the policy's death benefit and allowing the policy to build a cash value. The policy owner can borrow funds against that cash value or in some instances withdraw cash from it outright to help them meet needs such as paying for a child's college education or covering medical expenses. So that cash component is kind of like, you could think of it kind of like an investment type of side of it which can have some benefits, but when you're thinking about that and using that as your rationale, you want to always be keeping the idea of, well, why don't I just buy the term which is cheaper and invest the difference? You need to have some rationale of why it is that you would not be doing that and buying more complex kind of things such as tax savings, estate planning, or you just want to have the life insurance for life instead of a term even though you could pick the term which could be fairly long term. So there is often a waiting period after purchasing a permanent life policy during which borrowing against the savings portion is not permitted. So basically if it's locked into this savings portion, then one of the issues with that is you can't usually take it out, but if you could borrow against it, that's kind of like taking it out. So that could give you some kind of security which you might not have that same capacity if you say invested somewhere else which would be the strategy, the baseline strategy, invest in term or buy term and then invest the difference because it would be cheaper if you invest the difference in a 401k plan or something like that, you might not have that same option of being able to kind of borrow against it and kind of almost similar to just taking the money out. So this allows sufficient cash to accumulate in the fund if the total unpaid interest on a loan plus the outstanding loan balance exceeds the amount of a policy's cash value, the insurance policy and all coverage will terminate. So permanent life insurance policies enjoy favorable tax treatment. So once again, the rationale for the term policy would be why don't I just buy the cheaper term policy and invest the difference? Why don't you get a tax benefit to it? Maybe that's one of the rationales. So the cash value growth is generally on a tax deferred basis. That's kind of similar to like a 401k plan or an IRA or something like that. You put the money in, you get a tax benefit or you don't have to pay taxes at that point in time. When you take the money out, then possibly being taxable at that point which means you deferred the taxes. You got to take the taxes later. So meaning that the policy holder pays no taxes on any earnings as long as certain premiums limits are adhered to, many can also be taken out of the policy without taxes because policy loans are usually not considered taxable income. So in other words, when you take the money out, like if you think about a 401k plan or you think about an IRA, when you take the money out, typically at retirement, at those cases you still have to pay taxes on it and you can't really take the money out early or you get taxed from it. But if you look at the insurance plan here, well, you can't really take the money out technically possibly if you take a loan against it. It's kind of like the same thing and if you take a loan against it using that cash value as collateral, that's not really income at that point. It's not really considered income even though you got the tax benefit when you put it in. And so you might not have a taxable event at that point because it's a loan. Generally withdrawals up to the total of the premiums paid can be taken without being taxed. Permanent life insurance versus term life insurance. Different people have different insurance needs at different periods of their lives. Term life insurance is popular for its lower premiums, but it usually will expire well before the end of the policy holder's life. So if you're looking at term, usually you're buying life insurance to cover people that are dependent upon you over a certain time frame. And the hope would basically be, well, I'm going to wait until these children are growing, it's just paid off or something like that. Once my debt is paid off, once people are no longer dependent upon me because they're old enough, which would be like 20 to 30 years for something, then possibly I don't need the life insurance at that point and possibly I have enough assets to be self-insured in the event that I die, meaning I have more assets than liabilities and possibly I can leave those assets to people, for example. While the aim is to have paid off most debt and other financial obligations by that time, while also occurring significant savings to make a large amount of life insurance unnecessary, some people may find that they prefer ongoing coverage and savings opportunities might want a new permanent policy. So you might say, well, I would rather have the permanent policy, even though I'm hoping that at retirement, once I'm like 60 or something like that, that I don't have people that are dependent on me in that way and hopefully have my debt paid off at that point in time and so on, because hopefully you're thinking that the life insurance is covering the people that are dependent upon you when possibly you have a family and you're taking out a loan and a mortgage and that kind of stuff in the middle of most people's lives. So for this reason, many term life policies offer the option to convert to permanent policies later, often without the need to take medical exams or otherwise qualify again. So you could get a term policy that has the capacity to convert if necessary, which could be an option to look into, then you kind of get the best of both worlds if your option is to say that you would like to have the insurance available to you at the end of the term if necessary. So such a feature might make the conversion appealing for someone with medical issues that could make a new policy prohibitively expensive or with chronic conditions requiring ongoing expenses drawn from the savings. So while the premiums for permanent life insurance are much more expensive than those for term coverage, those who would sign up for such policies have earned enough by that stage of life to afford them. With the added opportunity for savings, they can also use it as a tax favorable investment vehicle to cover the needs of lifelong dependence or the estate planning purposes. So estate planning obviously gets into more complex kind of scenarios with the estate planning. So possibly you might have estate planning because you might have like a death tax or something that you're trying to account for or avoid, those are typically going to be more wealthy individuals planning. If you're thinking about normal tax planning, then oftentimes you might be saying, hey, maybe it would be better for me to take the money that I was going to put into the life insurance and just by term and invest the difference in a 401k plan or in an IRA. But what if you've maxed out the IRA? If you've maxed out the IRA, then possibly you're looking for another place to get a tax incentive at that point in time. So that might be another kind of place or area where you'd be looking for and then you have those other kind of benefits which could be that you have that cash value that you possibly could borrow against in the event that you needed to which you might not have as much capacity to do if you had the money in like an IRA, 401k, 403b or something like that. Advantages and disadvantages of permanent life insurance. There are pros and cons to purchase permanent life insurance. If you can afford the higher premiums, the permanent life insurance allows you to provide a death benefit to your beneficiaries without a constraint of term life insurance. So obviously the term insurance is going to end at the end of the term. So and obviously if you're getting to like, it's like the life insurance is going to expire within one year and then obviously all your whole family probably conspires to kill you at that point in time so they can get the policy. So if you have the life insurance permanent then you don't have that timeframe where that happens. So but obviously the term life insurance ends at some point in time, it's a term. So the permanent life insurance policy allows you to invest in an account with a tax advantage which you can borrow from or use during the lifetime of the policy as well. The downside to purchase a permanent life insurance policy are the high costs of the premiums which is why you often hear the adage of why don't I buy term and invest the difference. That's what you need to argue against what kind of strategy are you aiming for with the permanent life insurance to not do that adage to not just buy pure life insurance and invest the difference. So the risk of not being able to afford to keep up the payments and spending down the cash policy so much that it eats into the death benefit. So what is permanent life policy, what is permanent policy life insurance? Permanent life insurance is life insurance policy that unlike term life doesn't expire until the death of the policy holder. So it usually comes with a cash value saving component. What are the four types of permanent life insurance? The four types of permanent life insurance policies are universal life, whole life, variable universal life, and variable life. What is better life insurance term or permanent? I'm expecting a yes or no answer here which is better both term and permanent life insurance can help you protect your loved one's family. That's not, that's an evasion of the, that's I want a yes or no. So the kind to buy should be the one you can afford to pay premiums on. So obviously you want to be able to afford it. Permanent lasts longer and has a cash value component but its premiums are usually much higher than term life insurance. Can you cash out permanent life insurance? Yes, you can cash out permanent life insurance either by borrowing against your policy withdraw money in your cash value or you can surrender the policy. So the cash value component of it is kind of like an investment side of it where you have in essence basically this investment component. That's why it's a little bit different than term which you would think is pure life insurance which you can't typically cash out because you're just buying life insurance for it. And remember this other added component of borrowing against it. I mean you might say if the government says you can't pull the money out because you put it under this umbrella and we gave you a tax benefit and you say well can I take a loan against it and use it as collateral? If you could do that well then you kind of know what the government does. The government didn't tap into the social security funds or anything like well they borrow it again isn't that the same, wait a second isn't that the same thing so that's kind of a work around type of thing. So if you do the latter you may be forced to pay fees and taxes on your withdrawal. So that's what the borrowings kind of work around for. How long does permanent life insurance last? If you pay the premiums on your policy and do not let the policy lapse or surrender it a permanent life insurance policy will last for your lifetime. That's hence the name.