You may think life insurance is only
of value to beneficiaries. However,
there are many benefits to permanent
life insurance that you can actually
realize during your lifetime, which
can make life insurance important for
both you and your heirs.
Life insurance protects your family’s
financial future. The death benefit
from a policy creates a pool of money
that can help to pay final expenses,
compensate for lost income, and
enable your family to maintain their
standard of living.
Pure insurance protection is valuable,
but has equally valuable benefits
beyond that protection. Because of
its varied benefits, permanent life
insurance rarely outlives its usefulness.
In fact, it can provide solutions
during your lifetime known as
“living benefits.”
Tax-Deferred Cash Value
Perhaps the most familiar living
benefit of permanent life insurance
is the tax-deferred accumulation of
cash value in your policy. This means
that all your accumulated cash value
can go to work for you—instead of
part of it going to the government as
taxable income—allowing your funds
to accumulate faster. At your death,
depending on your policy, the cash
value could be included in the death
benefit, which means your family
could receive those funds generally
income tax-free and free from probate.
You can access the cash value of a
permanent life insurance policy—via
policy loans, for example—to help
buy a house, pay for your child’s
college education, or supplement
retirement savings.1 Keep in mind,
when you pay back that loan into
your policy, you are really paying
yourself back and restoring the
policy to full value. Depending on
your policy, you may also have the
option of accessing your cash value
through partial surrenders.2
Dividends
Participating permanent life insurance
policies are eligible to pay out dividends
to policyholders.3 When
declared, dividends are paid on each
eligible participating policy’s anniversary
date.
One of the many living benefits of
dividends is that they can be left in
the policy to earn interest. You can
even use them to purchase additional
insurance coverage within your
policy (which generates its own cash
value and is eligible for dividends3),
without having to provide evidence
of insurability. Since you have a
choice in how to use your dividends,
you can also opt to receive them as
cash payments, which can create a
supplemental income stream.
One of the many living benefits of
dividends is that they can be left in
the policy to earn interest. You can
even use them to purchase additional
insurance coverage within your
policy (which generates its own cash
value and is eligible for dividends3),
without having to provide evidence
of insurability. Since you have a
choice in how to use your dividends,
you can also opt to receive them as
cash payments, which can create a
supplemental income stream.
Dividends are a return of premium,
and thus, generally do not create taxable
income (unless the total dividends
exceed the premiums paid).
Riders
Riders are a basic but often overlooked
benefit of life insurance, and
many riders are designed specifically
to benefit the policyholders. A rider
of significant worth, the Waiver of
Premium (WP), provides that New
York Life will waive your premiums
should you become totally disabled.
With a WP rider, your policy will be
protected, your policy won’t lapse,
and many living benefits will be
available to you through the policy,
regardless of disability. Additional
riders can help maximize the living
benefits life insurance can provide.
Pension Maximization
Many people obtain life insurance
when they have children, and often
allow those policies to lapse once
the children are self-sufficient. But
the policy you took out to protect
your family’s financial security may
benefit you at retirement. For
instance, having a life insurance policy
may allow you to capture your
full pension benefits during your lifetime,
while still providing for your
surviving spouse.
The way this works is that you elect
the maximum retirement benefit (the
plan payout option) you are eligible
to receive, without survivor provisions.
With the additional income
you’ll receive from the higher benefit,
you can purchase life insurance—
either a new policy or additional
coverage—in the amount necessary
to ensure your spouse is taken care
of after your death. In this way,
while you live, you’ll receive the
maximum benefit from your retirement
plan. At your death, your spouse will receive the death benefit
to compensate for lost retirement
income—generally income-tax-free.
Pension maximization is not appropriate
in all cases. Sometimes election
of the joint payout option is necessary
for health benefits to continue
for the spouse. Also, the client’s age
at the time of sale is critical, especially
if dividends3 are used to pay premiums.
It is also important that the
policy be kept in force and not
allowed to lapse. You should discuss
your specific circumstances with your
agent, your plan administrator, and
your professional advisors.
Spending Down
Your Qualified Plan
The government requires that you
begin to withdraw funds from your
qualified retirement plans or IRA no
later than April 1 of the year following
your 70th birthday. If you do
not withdraw at least the minimum
distribution every year, you are
heavily taxed.
You may be planning to withdraw
just the minimum distribution to
preserve your assets for your heirs.
However, this method prevents you
from freely spending money you’ve
worked to accumulate for your retirement
years. Having permanent life
insurance will allow you to spend
down your qualified plan assets at
a rate that is higher than the minimum
distribution. This will give you
financial flexibility, while assuring
your heirs will receive the death benefit
from the life insurance policy.
Also, significant balances in qualified
retirement plans may, upon your
death, be subject not only to income
tax, but also to estate taxes.4 Life
insurance can give you more of your
retirement income while you live, as
well as provide an inheritance for
your heirs.
Creditor Protection
Creditor protection is another living
benefit of life insurance. Depending
on state laws, cash value life insurance
may not be treated as an asset
subject to liability judgments.
Should you be sued (either as an
individual or as a business owner),
life insurance policies—unlike
many investments, such as savings
accounts or even your home—
remain untouched, providing you
with financial options, regardless of
the outcome of your case.
Mortgage Protection
A reverse mortgage is a planning tool
that can convert part of the equity in
your home into tax-free income without
your having to sell the home or give up the title. Having a life insurance
policy in force can allow your
heirs to pay off the mortgage in the
event of your death, while using
reverse mortgage proceeds to help
supplement retirement income, or
even reduce the taxable value of
your home for estate-tax purposes
during your lifetime.5
Permanent Life Insurance—
So Much to Offer
These and other living benefits of
permanent life insurance can help
take care of you, and the death
benefit can help take care of your
heirs. That’s why it’s so valuable.
And bear in mind that living benefits
will last as long as the policy
remains in force, or until it matures
(usually at age 95 or 100), so it’s
unlikely you’ll outlive the need for
permanent life insurance. Even after
you’ve raised your family and are
enjoying an empty nest—when the
need for the pure protection of life
may seem to have diminished—you
may find that the benefits of keeping
the policy in force until you die
can give you added freedom and
security in your senior years.
1Loans against your policy accrue interest at the current rate and decrease the death benefit by the amount of the
outstanding loan and interest.
2Partial surrenders will reduce the death benefit and may carry a 10% tax penalty if the policy is a modified endowment
and the policyholder is not yet age 59 1⁄2.
3Dividends are not guaranteed, nor are past dividends any indication of future performance. However, New York Life
has paid an annual dividend to participating policyholders every year since 1854.
4The Economic Growth and Tax Relief
Reconciliation Act of 2001 gradually reduces
estate taxes through 2009, then repeals them for
one year only (2011), after which 2001 guidelines
are reinstated.
5Please speak to a mortgage banker to find out
more about reverse mortgages and if this option
is right for you.
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