How to Benefit From Permanent Life Insurance While You're Living

Permanent life insurance is the foundation of a financial plan, helping to protect your goals and take care of your loved ones should something happen to you. But the value of life insurance goes beyond risk protection. It can be an asset — and offer other financial benefits — throughout your life.

There are two types of life insurance, term and permanent, which are best known for providing a death benefit. Term life insurance provides protection for a specific period of time (e.g., 10, 20 or 30 years) and pays a benefit only if you die during the term. If you outlive your policy, it will expire, and your coverage will end.

Permanent life insurance, on the other hand, provides protection for the duration of your life, as long as you pay your premiums. But it also offers an added benefit you may be less familiar with. Permanent life insurance policies build equity, known as cash value, over time. You can access it whenever you want. This cash value, along with some tax advantages, means there are actual living benefits to a permanent life insurance policy. Here are some of them.

1. GUARANTEED GROWTH AND UNIQUE TAX ADVANTAGES
   
   
   
   Permanent life insurance offers many tax advantages, including cash value that grows in a tax-advantaged way. As long as you leave the gain in your policy, you won’t owe taxes on it. And, there are ways to access the cash value without owing taxes. In addition, the death benefit is generally tax-free. With the most common type of permanent insurance, known as whole life insurance, your cash value is guaranteed to grow and never decline in value. And, dividends can help your cash value grow and compound even faster. Though they are not guaranteed, Northwestern Mutual has paid dividends on its insurance policies every year since 1872.
   
   
2. FLEXIBLE FUNDS FOR RETIREMENT
   
   
   
   In retirement, the cash value in a whole life insurance policy can serve as an important, stable part of your financial plan, helping you minimize your taxes and ride out market downturns. If you no longer need the death benefit and would like guaranteed income from your life insurance contract, you also may choose to have the policy payout a lifetime income in the form of an annuity.
   
   
3. COLLEGE SAVINGS
   
   
   
   Life insurance cash value is one of the few assets not considered in federal financial aid calculations for college. So if you have college-age children and you have a whole life insurance policy, you can use the policy’s cash value (via policy loans or policy surrenders) to help pay for college expenses. Because this asset is excluded from financial aid calculations, you’re also not hurting any potential financial aid offers.
   
   
4. LOCKED-IN INSURABILITY
   
   
   
   Basically, this means that you can buy more insurance without taking another health exam — even if there is a change in your health that would make it difficult to get insurance. Buying life insurance early in life is the best way to lock in your insurability, whether you are a parent buying life insurance for your children or a young, single person without a spouse or children.
   
   
5. LONG-TERM CARE
   
   
   
   Many insurance policies include options that allow you to access your death benefit in order to pay for long-term-care expenses. You may also be able to exchange your policy in the future for a long-term-care policy. A financial planner or professional can tell you more about these options.

In addition to its living benefits, there are many opportunities to leave a legacy through life insurance in addition to providing for your spouse, family and other heirs. If you own a business, a life insurance policy could become part of a buy-sell agreement to ensure continuity of a small business or to liquidate your ownership stake upon your death. If you have a favorite charity or local cause, you can name the organization as a beneficiary so you can fund a legacy gift.

Permanent life insurance is a flexible asset that can add value to your financial plan while you’re still living. Just be aware that how you use the living benefits as there may be tax consequences, so work with a financial professional and tax advisor to understand your options and determine the best course for your individual circumstances and needs.