How Permanent Life Insurance Can Benefit You in Your Lifetime

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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