Using Permanent Policies to Enjoy Life’s Milestones
Life insurance doesn’t just protect your loved ones if you were to pass away. Some life insurance policies can provide you with living benefits to enjoy with the people you care about.
How do the Living Benefits of Life Insurance Work?
When you buy permanent life insurance, you build cash value that accumulates throughout your lifetime. Not only will your beneficiaries still receive a death benefit upon your passing, but you can withdraw some of the money you’re accumulating while you’re still living.
While a cash-value life insurance policy is more expensive than its term life counterparts, the policy’s perks are worth it. Here are a few of the living benefits of life insurance that you can use your cash value on:
Getting a Mortgage
Buying a home is one of the biggest purchases you’ll ever make. It’s also often the most expensive. With permanent life insurance, you can borrow against your policy to cover the fees associated with buying a home, like:
- Your down payment
- Closing costs
- Home inspection
- Renovation or remodeling costs
- Moving costs
If you borrow enough to put 20% down, you can also avoid having to pay personal mortgage insurance (PMI). PMI is an additional bill you have to pay until you’ve got 22% equity in your home. A higher down payment can also equate to a lower interest rate, which reduces the amount of your monthly mortgage payments.
You may also be able to secure a 15-year mortgage, rather than the standard 30-year. With a 15-year mortgage, you can pay off your home in half the time with an even smaller interest rate.
Helping Pay for College
Education is expensive, and your children may need help. With a cash-value plan, you can assist your kids in paying for their tuition, housing, textbooks, and more.
Better yet, a cash-value life insurance plan is not currently considered in federal financial aid calculations. It’s not part of your expected family contribution (EFC), the amount the government believes your family is able to contribute based on their assets, income, and other factors.
Like other investments, permanent life insurance policies span a range of risk and potential return that goes from conservative to aggressive. Traditional whole life insurance policies tend to be more conservative, while variable universal life policies allow you to be more volatile.
With the stock market soaring, it’s unlikely that your permanent plan has accumulated as much wealth as your IRA or 401(k). They usually have caps on their gains and losses, which are usually around 10%. That is well below how many indexes have performed in the past year.
Even so, you’re still gaining wealth with a permanent life insurance policy. These gains are available for you to enjoy as a living benefit.
Supplementing Your Retirement Income
Savings for retirement is stressful, and with so many Americans in debt, it’s hard to do. The cash value you’ve built can cover some of your retirement if you haven’t saved enough money.
If you’re going to do this, be careful. Money doesn’t last forever, and if you don’t replace it, it’s less money that beneficiaries will receive after you pass.
Your cash-value policy is an investment that’s not subject to taxes immediately. Instead, it gets taxed when the money is withdrawn, much like with a 401(k) or a traditional IRA. This means that 100% of your growth is compounded, resulting in larger gains.
Here’s what we mean:
Let’s assume that you and your sister both $100,000. Her money is taxed annually, while your is tax deferred. Let’s also assume you’re both:
- Expecting a 10% annual rate of return,
- Investing this money for 10 years,
- Have a marginal tax rate of 30%, and
- 10% of your investment return is taxable.
Here’s what the future value of your money will look like:
With tax-deferred growth, you’ll end up with $55,671.45 more than your sister by collecting a 2.7% higher annualized yield!
For fun, play around with this taxable vs. tax-deferred calculator to discover the varying differences of your returns.
Final Thoughts on Living Benefits
Cash-value policies cost more than a term life policy, but the perks are worth considering. After all, who doesn’t want to enjoy the living benefits of life insurance while they’re still, well, living?
To find the best cash-value plan for you, fill out our life insurance form today.
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