Benjamin Franklin, famous founding father of the United States, once wrote, “In this world nothing can be said to be certain, except death and taxes.” Unfortunately, despite its certainty, far too many Americans fail to prepare for their eventual demise—and they leave their families to pay the price. In fact, according to the Life Insurance and Market Research Association (LIMRA), while 85 percent of consumers agree that they need life insurance, only 62 percent have actually purchased a policy.
Permanent life insurance is a category that encompasses whole life, universal life, index-universal life, variable life and variable-universal life policies. While each type of policies differs in its details, all provide a death benefit plus cash savings. This makes permanent life insurance an attractive investment for many consumers. Of course, there are a few things you should consider before you join them.
- Permanent life insurance may be more coverage than you actually need.
If you’re single, childless, or have grown children and have paid your mortgage in full, you might be better off with a less expensive term life insurance policy. It will provide you with a death benefit for a set number of years at a much lower premium. However, if you have a family or carry a lot of debt—including a mortgage—the higher cost of permanent life insurance can be worth it, providing your loved ones with a death benefit plus the cash value of the policy.
- If you want to grow your investment, permanent life insurance may not be your best option.
If you want the greatest return on your investment, some advisors suggest buying a less expensive term life insurance policy and putting the difference into other investment vehicles. For example, a $1 million permanent life insurance policy might cost $13,900 a year while a $1 million 20-year term life insurance policy costs $750. If you invested the $13,000 difference the first year at 5 percent and let it grow for 20 years, you’d have $34,492.87. Do that every year and you’d have significantly more.
- Permanent life insurance can be a good investment in the right situation.
Your heirs won’t pay taxes on the cash value of your permanent life insurance policy until after your death. This means permanent life insurance can be a useful investment for individuals with high earnings who have maxed out their other tax-deferred savings options. Additionally, permanent life insurance can be useful for older individuals who don’t have much in the way of savings but want to leave a monetary inheritance to their loved ones.
Whether you prefer whole life insurance (with a fixed premium), universal life insurance (with adjustable premiums) or variable life insurance (allowing you to choose how the cash value is invested), talk to your insurance professional about protecting your family from the inevitable today.