You’d have to be living under a rock to not have heard “Buy Term and Invest the Difference!” that a few famous “Financial Gurus” tout. While I agree that Term Insurance and Investing has its place in a family’s overall financial plan, that is not entirely sound advice for most people. Term insurance is, by all accounts, a “Rented” policy. It expires after the set term length, and if you’re not healthy enough (or too old) to requalify for another term, you’re out of luck. Not to mention having nothing to show for all those premiums you paid over the years. When the term is up, your death benefit is gone, and so is all that money you paid into the policy. And guess what? The majority of people that have term insurance outlive it.
Don’t get me wrong here, Term Insurance has its place within a sound financial plan, (i.e., covering protection needs that may disappear over time like mortgages, college expenses, etc.) but it should never be the “be all-end all” when it comes to protecting your family and your financial plan.
As far as “investing the difference” what exactly will you be investing in? Investing wisely is a key factor here. Stocks, Bonds and Mutual Funds are options, but also carry risk where you could LOSE money. Bank CDs are at an all-time low in interest rates, so while an option for the more risk adverse, you won’t be earning much, let along keeping up with inflation. Fixed and Fixed-Indexed Annuities are a good option, but there are penalties if you withdraw funds before 59 ½ because they are considered savings for retirement, not to mention the interest earnings are taxable as ordinary income.
So all of this brings us to today’s Blog topic: Permanent, Cash Value Life Insurance. Commonly known as Whole Life or Universal Life Insurance. There are MANY aspects and benefits that should not be over looked with Permanent, Cash Value Life insurance. Need to protect your family in case of an early death? You got it. Want to supplement your retirement in a tax free way? It can do that. Want to BECOME YOUR OWN BANKER to pay for college expenses, a new car, or whatever else you might to go a bank for? YES!!! That is possible!!
Here are 17 Outstanding Reasons for Permanent, Cash Value Life Insurance:
- TAX FREE Death Benefit
It is LIFE Insurance after all, so it protects your family against early death. However, unlike Qualified Plans, IRAs & Annuities that are taxable to your beneficiaries, the death benefit is Tax Free. In fact, the benefit can be used to help pay the income taxes on those plans, as well as Estate Taxes that maybe due upon your death.
It can be used in replacing lost Social Security and/or pension income to your spouse. Again, TAX FREE.
- TAX FREE Accumulation
The Cash Value on these plans accumulate on a tax-deferred basis, and if withdrawn from properly, will be tax free to you.
Speaking of which, that brings me to:
- TAX FREE Distributions
WITHDRAWALS (up to the cost basis) are Tax Free to you. The Cost Basis is based on the amount you have put into the policy. These funds can be used to give you tax free income in retirement.
POLICY LOANS are tax free as well. While outstanding loans will lower the death benefit upon death, they are a great way to “Be your own Banker” and give you an extra Liquid Emergency Fund
- TAX FREE Transfers
You can transfer the Cash Value of your policy to another Life Insurance policy or an annuity via IRC Section 1035(a) via Tax-Free Exchange.
- NO 10% pre-59 ½ IRS Penalty on Withdrawals
(non MEC) Cash Value Distributions are NOT subject to the 10% pre-59 ½ IRS Penalty because they are tax free in fact:
- NO 1099R!!
Tax Free income means NO 1099 and no reporting to the IRS.
- NO OFFSET for Social Security
In determining how much of your Social Security benefit is taxable, Cash Value Loans and Distributions are NOT COUNTED, unlike Taxable Investments and Tax Free Municipal Bonds (How about that “investing the difference” point again?)
- Creditor Protection
The Cash Value in Permanent, Cash Value Life Insurance is NOT attachable by Creditors.
- Can be used as collateral
If you DO need a loan from a Bank (for personal or business reasons), you can use the Cash Value in your policy as collateral. Of course, the bank may require you to “Collaterally Assign” the policy to them until the loan is paid off. (which guarantees their note is paid first before other beneficiaries)
- It’s PRIVATE
There are NO Public Records as your Life Insurance policies generally AVOID PROBATE. (the exception is if a person names their Estate as the beneficiary)
- Waiver of Premium/Long Term Care/Accelerated Benefit Riders
Because of Waiver of Premium (WOP) Life Insurance is the ONLY self-completing savings, college funding, & Supplemental Retirement plan.
Long Term Care Riders offer a way to access a portion of the DEATH BENEFIT for Long Term Care needs, and similarly, Accelerated Benefits Riders allow you access to a portion of the overall DEATH BENEFIT of the policy should you be diagnosed with a terminal illness.
*Most policies offer the Accelerated Benefit for no extra fee, but other riders like WOP or LTC have a fee to add these riders that will be added to the premium.
- Has GUARANTEES
ONLY Life Insurance and Annuities can guarantee your investment principal AND offer you a minimum growth rate for the life of the contract. No stock, bond, or mutual fund can.
- No Alternative Minimum Tax
Again, no 1099R reportable income, so Tax Free Cash withdrawals or Policy Loans are not subject to this. (See a pattern here?)
- Not a countable asset in qualifying for Obama Care
Tax Free Cash withdrawals or Policy Loans are not subject to the 3.8% passive income tax under the Affordable Care Act (ACA)
- Not a countable asset in qualifying for FAFSA (financial aid for college)
Not only is it not countable as an asset, but Tax Free distributions are not countable as well when applying for FAFSA for you or your loved ones!
- Not countable as income in Medicare Means-Testing
Tax Free Cash Value distributions and policy loans do not count as income in Medicare Means-Testing in determining your Medicare Part B and Medicare Prescription Drug coverage premiums.
- It’s UNLIMITED
Unlike Qualified Plans and IRAs, there is NO LIMIT on how much you can save – you are only limited by the size of the policy!
As you can see, Permanent, Cash Value Life Insurance is a lot more than meets the eye, and can be a GREAT piece within your overall financial plan. Living Tax Free…it is possible!