Sunday, May 29, 2011

What Should You Know ABout Permanent Life Insurance

Permanent life insurance serves to protect your family's finances when you die, while also providing an investment component-savings build within the policy, and you can tap or borrow against this "cash value".

In contrast, basic term insurance offers coverage for a certain number of years with a much lower premium, where at the end of the term, you typically can't get any cash back.

Because premiums on permanent insurance are high, you may be tempted to skimp on the death benefit. (A $1M policy for a healthy 40-year old woman can run as much as $13,900 a year; she can get a $1M 20-year term policy for $750.) Plus, policies are sometimes so opaque that it's difficult to assess the investment potential. Buy term and invest the rest as an alternative. You can have control over expenses, - and a shot at better returns.

Cash that builds in such policy isn't taxed until it's withdrawn. (You can avoid those taxes by taking "loan", which reduces the death benefit.) This makes permanent insurance useful for high earners who max out other tax-deferred savings.

A permanent policy may also make sense for older people who'll have illiquid estates such as small business owners - but want to pass on money because it lasts a lifetime.
The death benefit is often greater than what they'd be able to save.

Take note of the 3 types of permanent insurance:
  • traditional whole - it has fixed premium and guaranteed minimum growth.
  • universal - allows you to raise or lower your premiums and resulting cash balance.
  • variable - sets you to choose how the cash is invested.
If you feel you're qualified for a permanent policy, find an expert to help you pick among the 3 types. Usually pros can charge hourly fees, if you're thinking of one to help you.

It can take possibly a decade or so before a permanent policy's cash value - what you'd get back if you gave up coverage - catches up the premiums you've paid. There can also be surrender charges in the early years.