Life Insurance: You Don't Have to Die Anymore to Benefit

Do you have to die to reap a return on your life insurance policy?  If you do have a life insurance policy, do you think you are worth more today, dead than alive? Well, I'm not sure how your family would appreciate the answer to the last one but in today's modern economy, life insurance companies along with their permanent insurance policies are garnering much attention during a rocky economy.

A few reasons why:

1) Safety - According to Byron Udell, a lawyer and Certified Financial Planner who is founder and CEO of Accuquote says, "Life insurance companies as a general rule don't invest more than 5% of their investable assets in equities.  Most of their money is in bonds and they are very conservative.  Otherwise there'd be many insurance companies going out of business right now [as compared to banks and large corporations]." 

Excluding variable life policies who are directly affected by day to day stock market volatility,  the positive results are passed on to current policy holders who have not experienced major ups and downs in the cash value of their permanent life insurance policies.

Think about it, how many life insurance companies DO you hear are having major financial difficulties today?  Not many, if at all.  What about AIG you say?  Well, it was the holding company that was having major issues, not their subsidiary American General Life Insurance Company who is currently rated A+ (meaning Strong) by Standard and Poor's.

2) Guarantees - permanent life insurance policies (whole, universal and index universal) have an annual fixed return stated upfront.  Within index universal policies, many policyholders can choose either the fixed return or the upside gain, limited to a certain amount (or cap), in the index they choose that the life insurance carrier offers in their policy (S&P 500, Hang Seng, EuroStoxx, etc).   If the economy where to experience a drop in value, permanent life insurance policies will still get credit for the promised fixed returns and better, their current cash value is also protected from any downside risk.

3) Tax Advantages - a properly structured permanent life insurance policy (not term insurance) in accordance w/IRS section 7702 provides for the accumulation of cash value that can grow tax-deferred and accessed via loans/withdrawals without paying tax.  Plus this does not employ the tricky pre-59 1/2 year old withdrawal policy that comes along with traditional IRAs and 401(k) plans.

Lastly, if you are facing bankruptcy, the Illinois Complied Statues allows proceeds and cash value from your permanent life insurance policy to be 100% exempt from creditors.

I hope this helps trigger deeper questions and quality conversations between you and your financial advisor or life insurance agent on where to put your serious money.

Byron Udell continues, "You can always get another style of mutual fund, savings or brokerage account. But there is nothing in the marketplace that is similar to what life insurance can do for you overall.  There is no substitute for it."

 

 

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  • Here is the problem. You have to compare the effective mortality cost of a permanent policy to the effective mortality cost of a term policy. An insurance guy is trying to convince me to convert my term policy to a permanent policy. When I analyzed the two alternatives I discovered that I would have to live for more than 10 years to benefit from the conversion. If I died sooner I would walk away (well, I guess it wouldn't be me doing the walking) with less total cash because the effective mortality cost of the permanent policy was higher in the early years - by a lot. I suspect the difference goes to paying commissions to the agent.

  • Gary, thx for your input. This is where one has to understand what life insurance is doing for them in the big picture of things. The same idea goes for a realtor's business with their clients. Would they allow someone to get get a 30-yr mortgage to buy a home if they really aren't staying in Chicago for more than a few years? Wouldn't they be better off renting instead?

    But the realtor doesn't make much commission from renters, do they?

    That's what term insurance does...it "rents" life insurance for you and you'll never own anything after paying it for the term of the policy.

    To add, the mortality cost for most insurance companies are fairly close & competitive based on the latest 2001 CSO tables.

    Back to life insurance, the worse case scenario happens with term insurance when you really would like to KEEP the policy and you CAN'T because to renew it for another 10, 20 or 30 years will cost an arm and a leg. In fact, they'd probably have to get a mortgage to pay for this increase in cost, eh?

    This is where the permanent policy benefits can fly way past the term insurance scenario...and you'd be thankful your insurance agent at least shared with you, your options.

    But the basis of this post was to share how permanent life insurance has significant cash value build up with fixed or guaranteed rates, isolated from ups and downs of the stock market and have this cash accessed at a later date with hard-to-match, tax advantages. Isn't this guidance and lifelong, generation-changing benefit worth the advice of a properly licensed, educated and experienced agent?

  • In reply to Matt Sapaula:

    Well, you're talking to a guy that has rented for the last 12 years and he's damn happy he did! (But I'm looking to buy now) I never bought the notion that renting is throwing your money away. It's a pure financial decision. Which way is cheaper?

    When evaluating term vs. permanent policies one always has to consider how one would invest the difference. Often the invested difference will cover the higher costs in later years plus give you greater flexibility.

    The problem is that I think it's actually hard to get increasing term now. They always want to sell you level term and that also suffers from the over charging in the early years problem.

    The other issue is that insurance guys are like realtors - about 80% of them aren't very good. Most of them just don't understand the concept of time value of money/ discounted cash flow.

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