Buying life insurance and only using it for the death benefit is like purchasing an iPhone and only using it to make calls – you’re missing out on a whole lot of added functionality.
Yes, life insurance provides a death benefit, but it can do so much more. In fact, it’s an asset that forms a cornerstone of your financial plan and can be used differently as your life progresses.
Here are ways you can use permanent life insurance at each stage of your life.
WHEN YOU ARE YOUNG
The Death Benefit. One of the best parts of financial planning is dreaming about all the things you want to do. Maybe it’s paying for your children’s education, your daughter’s wedding or visiting every continent in retirement. The plan depends on one major component: your ability to earn an income. Certainly, life will change for your family if you die too soon. But your children will still need things that would have been paid for with your income. Your spouse will still want to retire someday. The death benefit of life insurance guarantees you’ll provide for your family financially.
Insurability. This is your ability to get insurance. You pay less for insurance when you’re young and healthy than if you’re older and may have had health problems. Many insurers allow you to add a benefit at younger ages that gives you the right to buy more insurance without having to take an additional health exam. Locking in your health status is a key reason to buy life insurance when you’re young.
Let’s say you get cancer when you’re 30 and you recover (that’s the good news). But the scare makes you realize you probably need more life insurance. If you have a permanent policy that allows you to buy more, you can just do it — the fact that you had cancer is irrelevant. But if you try to buy a new policy, your history of cancer will likely make the insurance very expensive, if you can get it at all. This is a key reason why I bought life insurance on my children.
AS YOUR FAMILY GROWS
Guaranteed Growth and Tax Benefits. The cash value of permanent life insurance grows and compounds without incurring current income taxes on that growth as long as it stays in the policy. With whole life insurance (one of the main types of permanent insurance), your cash value is guaranteed to grow and to never go down. In addition, most permanent life insurance policies are eligible to earn dividends, which can help your death benefit grow and your cash value grow and compound even faster. While they’re not guaranteed, Northwestern Mutual has paid a dividend every year since 1872.
It Becomes a Source of Cash. As your cash value grows and compounds, it can become a sizable amount of money. You can access that cash through a policy loan, as collateral for a bank loan (like a home equity loan) or by surrendering your policy, often without incurring any taxes.1 The money is available for emergencies like an unexpected home repair or opportunities like a down payment on that lake house you’ve been dreaming about.
WHEN YOU RETIRE
It Shields You From Market Volatility. A substantial portion of your income in retirement will likely come from your investments. When the market is hot, that’s great. But what happens when the market falls? If you have to sell your stocks when they have lost value, you will take a huge chunk out of your nest egg. That’s where your whole life insurance cash value comes in. Because it doesn’t decline due to market events, you can borrow against it when the market drops. The money lets you keep enjoying life without fretting headlines. You don’t touch your investments until they regain their value. When they do, you start withdrawing from your investments again. For your finances, it’s as though the drop never happened.
It Can Help You Pay for Long-Term Care. As we age, many of us will need some form of long-term care. When the time is right, you may be able to use the value in your life insurance policy to fund the premium on a long-term care policy (tax-free) to help cover the costs of care. And many life insurance policies today offer a benefit that allows you to use a portion of your death benefit to pay for long-term care costs.
The Death Benefit. Permanent life insurance will pay a death benefit no matter what, generally tax free. Many people use this death benefit to leave a legacy and pass something on to their heirs or as a charitable donation. In fact, in retirement, a guaranteed death benefit may give you the peace of mind to spend down your other assets more freely.
1Your policy's cash value typically becomes a useful source of funds only after several years of premium payments, which allows the cash value to build up. Each method of utilizing your policy's cash value has advantages and disadvantages and is subject to different tax consequences. Surrenders of, withdrawals from and loans against a policy will reduce the policy's cash surrender value and death benefit and may also affect any dividends paid on the policy. Policy loans and automatic premium loans, including any accrued interest, must be repaid in cash or from policy values upon surrender, lapse or the death of the insured. Policyowners should consult with their tax advisors about the potential impact of any surrenders, withdrawals or loans. Cash value growth is not taxed if held until death. Generally, cash value from the surrender of your policy is taxed only when it exceeds premiums paid