Life Line


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Just When You Thought You Knew It All

By David F. Woods, CLU, ChFC, President of the LIFE Foundation

Something comes along to rattle your cage and make you rethink what you thought you had already settled. I've covered this subject before, but I'm always surprised that it keeps coming up one way or another. The issue is consumer attitudes toward permanent life insurance and the "AHA!" consumers experience when they realize permanent insurance may be a good thing after all - that maybe Suze Orman and their "term insurance and invest the difference" is not the only or even the best answer. Here are 6 rather basic reasons why permanent life insurance is a terrific and very underated product:

1) Term insurance "term"inates at a specific point in the future, usually before you die. Experience and simple logic tell us that insurance that we pay for and then don't have when we need it is a pretty bad idea. I'm not suggesting term insurance is not a good product or even that people shouldn't buy it. For very temporary needs and/or limited budgets term insurance is an ideal product. The important thing is to have enough, regardless of the kind. But if you absolutely want insurance when you die, the odds of term insurance filling the bill are slim. Only permanent insurance can guaranty to be there at your death, assuming you have kept up the premium payments. And under certain circumstances you don't even have to come up with the cash to pay the premiums.

2) Permanent insurance costs more at the outset and should only be purchased when your needs are covered and your budget permits you to pay a higher premium. But once begun permanent insurance premiums never increase while term insurance premiums will increase periodically, eventually becoming virtually unaffordable as you reach the older ages. This means that you will very likely drop the policy as you approach the ages at which death will most likely occur. Permanent insurance premiums remain level for life and in many cases can be paid from earnings in the policy as you get older. This means that when your income drops because of retirement you may well be able to cease paying your permanent premiums in cash and the policy will continue on until your death. It's an important aspect of sound retirement planning.

3) Likewise, if you have an economic reversal or crisis, the cash surrender values of a permanent policy can be used to pay the premiums and also to provide some cash to get you over the financial hump.

4) Permanent life insurance builds savings values over time. The earnings on those savings (interest and dividends) are sheltered from income tax during the accumulation period and perhaps forever if handled properly. Those values are available to you either through a loan against the policy or upon surrender of the policy. You do not need to "qualify" for the loan. Nor do you ever need to pay it back. The loan balance plus any accrued interest will simply be subtracted from the amount of insurance payable at your death. I have used those values to help pay for my kids' college, to help finance home improvements, buy a car, etc. In all cases, I have paid the loans back and now the cash surrender values are at full strength and fully available to supplement my retirement income, to cover a need for emergency cash, to pay for a retirement vacation for my wife and me, to help pay for long-term care or other emergencies, or simply help to increase the value of my assets at my death for my wife's, my children's or my grandchildren's use.

5) I have owned lots of term insurance and I now own lots of permanent life insurance. But no matter which kind I bought I have always added the waiver of premium provision. This provision guarantees that if I became disabled and could not pay the premiums, the company will pay the premiums for me. In my permanent policies that means not only will the death benefit continue, but the cash surrender values will continue to grow just as though I was paying the premiums. And when I go back to work I don't owe any money for back premiums.

6) The idea of "buying term and investing the difference" has superficial appeal. However, the reality is that if we are honest with ourselves, we have to admit that most of us are not disciplined savers or investors. Certainly the negative U.S. savings rate will demonstrate that notion. And what we do save is too often spent before it has much of a chance to build. And, finally, if we do invest the difference, far too often either we are way too conservative and lose money to inflation and lost growth opportunities or we are too aggressive and lose money as amateurs in a highly sophisticated field.

Permanent life insurance has been a vital part of my overall financial plan for 40 years or more. It gives me the peace of mind as I approach retirement that because I have it I have flexibility and the option to choose how to handle my financial affairs and, therefore, my life. It was, is and will be the foundation of all my financial planning. Just as term insurance is not the only answer for everyone all the time, so permanent insurance is not. But for long-term financial security, solid and relatively safe tax-favored long-term returns and maximum flexibility, permanent life insurance is almost unbeatable.