If you’re like most people, you may have considered buying life insurance. You might have already purchased a policy, or you could still be weighing your options. However, choosing the best life insurance policy for your needs can be challenging. If you are working with a certified financial planner or advisor, they may have recommended a permanent life insurance policy to you. In this article, we will discuss five benefits of permanent life insurance and the types of financial situations that are best suited for these policies.
Permanent Life Insurance vs. Term Insurance
Permanent life insurance provides a death benefit for your entire life, offering long-term security that can give you peace of mind and confidence in your financial planning. Permanent life insurance can be participating or non-participating whole life insurance, or universal life insurance.
Participating Whole Life Insurance: A participating policy offers a guaranteed death benefit and a cash surrender value that increases at a predetermined rate. Policyholders may earn more because they can receive dividends based on the insurer’s dividend scale. The death benefit and cash surrender value may also increase over time, depending on how you have set up your policy.
Non-participating whole life insurance: The death benefit of a non-participating whole life policy is guaranteed, and there is typically a cash component (cash surrender value) to non-participating whole life insurance. The cash surrender value will grow at a predetermined rate, but this policy doesn’t offer the option of receiving dividends.
Universal Life Insurance: This type of policy is more flexible than a whole life insurance policy. You may be able to adjust the amount and timing of your premiums. In some circumstances, you may be able to adjust your coverage, subject to the policy terms, additional underwriting, and the insurer’s approval.
A universal life insurance policy doesn’t pay dividends; however, you choose the investment options for the cash surrender value of your plan. A non-participating plan generally requires more involvement from the plan holder than a participating policy to monitor investments and make changes as necessary.
Cash surrender value (CSV)
The cash in the plan is typically referred to as the cash surrender value (CSV). The cash surrender value is the amount of cash built up in the plan, less any fees, penalties and loans the policyholder may have to pay if they cancel the plan. The growth on the CSV is typically tax-deferred, providing investors with a tax advantage. Depending on your policy, you may be able to use your CSV to:
- Take a policy loan directly from the policy
- Use it as collateral for a line of credit from a financial institution
- Have the CSV pay the premiums, if the terms and conditions of the policy permit it
- Withdraw the cash from the plan, but there may be tax implications
- Surrender the CSV, which cancels your payments and death benefit, and may have tax implications
Two important points to consider when thinking about buying a permanent life insurance policy are that premiums are typically considerably higher than term insurance and the investment returns may be more modest than you can get elsewhere. Being aware of these factors can help you weigh whether the benefits outweigh the costs for your financial situation.
Term insurance
A term insurance policy has a fixed amount and time period. You can purchase these policies for the length of time and amount you need. An example of a term policy is 20 years with a $250,000 death benefit. Premiums are typically set for a set period and are lower than those for permanent insurance. You can renew the policy once it expires, but renewal premiums are usually much higher.
People buy term policies to meet temporary financial obligations they want looked after if they pass away, such as paying off a mortgage or providing child care. They may choose not to renew the policy if the obligations they bought it for no longer exist.
5 Benefits of a permanent life insurance policy
Life insurance can be used to meet temporary needs, such as covering a mortgage if you pass away, or long-term needs, such as estate planning. If you need a policy to meet long-term needs or are a business owner, you’ll get several benefits from a permanent policy.
1. Estate planning
Permanent life insurance can be an important factor in estate planning. It can pay your taxes, increase the value of your estate and provide for your beneficiaries. Your death benefit remains in effect until you pass away, providing tax-free proceeds that can help your loved ones feel secure and confident about their future. The proceeds can pay the taxes owing on your estate, pay off debts, provide for loved ones, or leave a legacy.
2. Financial stability for beneficiaries
A permanent policy remains in effect until the policyholder passes away or cancels it. It can provide financial security and stability for your beneficiaries who depend on your income.
3. Cash surrender value
You can use the CSV for several purposes, including retirement savings or reducing your costs by using the policy value to help fund your premiums, if permitted under the policy terms.
Using the CSV as collateral for a line of credit from a financial institution can make the borrowing process much easier, since the line will be secured. You can also borrow against the CSV in the plan. Using a CSV for a policy loan simplifies the borrowing process, but you may pay a higher rate for the convenience.
4. Tax-deferred growth
If you’ve maximized your Tax-Free Savings Account and Registered Retirement Savings Plan, the cash portion of a permanent life insurance policy offers tax-deferred growth. Minimizing your tax burden will help preserve your wealth.
5. Forced retirement savings
Saving for retirement can be difficult when you have other expenses to cover. By combining a cash value with life insurance, you’ll automatically save for future goals like retirement with one payment.
Benefits for business owners
Business owners face many challenges, including unpredictable income and the need to make a succession plan. A permanent insurance policy can help with these issues.
If you have dependents, a permanent policy can provide financial security for them if you pass away. The proceeds can be used to pay off business and personal debts and to provide them with a source of income.
Business owners also use permanent life insurance to provide funds for the business. Proceeds can be used to cover operational expenses, pay creditors, or fund buy-sell agreements, so the business can be passed to the remaining owners.
Is a Permanent Policy Right For You?
Permanent life insurance provides valuable benefits for individuals with a permanent need for coverage, such as paying funeral expenses, taxes, caring for loved ones, or leaving a legacy. However, it is more expensive than term life insurance. Finding the best life insurance policy depends on your needs, objectives and overall financial plan. Talking with a certified financial planner will help you decide how best to meet your needs.
Our certified financial planners at MDL have been helping clients design their financial future by providing tailored, unbiased advice for their circumstances for more than 30 years. If you’re looking for a certified financial planner in Ottawa to help you reach your goals, contact us online or call us at 613-416-9649. We look forward to working with you!
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