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What Is Permanent Life Insurance?

“Life is like a box of chocolates, you never know what you’re gonna get.” Sound familiar? This metaphor was made famous by the movie Forrest Gump. While I’m not a fan of the movie itself, the metaphor certainly resonates – life is unexpected.

As you progress through life you’ll encounter various events and challenges that you can plan for– pregnancy, marriage, first time purchase of a home, etc. –and ones that catch you by surprise–car trouble, cash flow shortage, divorce, etc.

Unexpected or not, these events will impact your day-to-day life. I pride myself on being able to go with the flow, and in order to do that I need to be flexible. From a financial standpoint, that means I need a place to put my money that can provide me with the flexibility I need, when I need it. Say hello to permanent life insurance with cash value.

You likely already know that life insurance provides a benefit to loved ones, or a business, or an estate, when the insured dies. It can help keep families together, keep business solvent, and create legacies for future generations. However, there’s more to permanent life insurance than just a death benefit. Permanent life insurance builds cash value that allows the policy to act like a Swiss Army knife: one source to potentially solve numerous problems.

Below are a few examples of life’s events where this financial flexibility could come in handy:

1. College Planning

What happens if you decide to go back to school? Will you be ready to financially support the decision? Do you have enough saved to put your kids through school? The cash value in a life insurance policy could be used to help save for school, whether for yourself or your kids. Taking a loan or withdrawal against the cash value in your life insurance policy could help cover some of the costs.*  Also, the cash value inside a life insurance policy isn’t counted in federal financial aid calculations and loans taken against your policy do not  show up on credit reports.

2. Home Modifications

Roof start leaking? Need new siding? Having trouble getting around your house after being injured in an accident? A loan or withdrawal from your life insurance policy could help you cover costs for some (or all) of these modifications to your home. There is no credit check or home inspection like you might experience with a home equity loan.

3. Supplemental Retirement Income

With sufficient funding, a permanent life insurance policy can potentially be used to supplement your retirement income using tax-free loans and withdrawals. How many other tax free sources of retirement income do you have now? (Hint – for most people the answer is “zero”.) Some policies even offer income riders that can guarantee the income for life.**

4. Anything Under the Sun

Want to take a vacation? Looking to buy your granddaughter her first car? A permanent life insurance policy with cash value could assist you in the event you live too long, die too soon or become ill. Whether you’re someone who is nervous about potentially losing an income source your family depends on or a savvy financial planner looking for cash value growth, life insurance can help you prepare for the unexpected.

If you decide to access the cash value in your life policy, here’s what you need to know:

In order to take a distribution from your policy, a written request must be submitted. When taking a distribution, you have the option to take it in the form of a loan or as a withdrawal. Whether taking the distribution in the form of a loan or withdrawal, the distribution will ultimately reduce the policy’s cash value and death benefit. Taking a distribution in the form of a loan allows you to potentially pay back the policy, which may return the policy back to its original cash value and death benefit. When taking a distribution as a withdrawal, you cannot pay the policy back, , but you may be able to make additional or larger premium payments to restore the policy.

* Taking loans or withdrawals from a life insurance policy reduces the policy’s cash value and the death benefit and may result in a taxable event. Withdrawals may cause the policy to lapse if more premium contributions are not made. The ability of a life insurance contract to accumulate sufficient cash value to help pay expenses or meet accumulation goals will be dependent upon the amount of extra premium paid into the policy, and the performance of the policy, and is not guaranteed.

**Regarding tax-free loans and withdrawals – withdrawals up to the basis paid into the contract and loans thereafter will not create an immediate taxable event, but substantial tax ramifications could result upon contract lapse or surrender. Surrender charges may reduce the policy’s cash value in early years.
Life Insurance income riders typically have limitations and restrictions to exercising them, including but not limited to, minimum and maximum age requirements, years policy has been inforce and minimum policy values. Receipt of other policy benefits that reduce policy values may also reduce the ability to exercise the income rider. Receipt of income benefits will reduce the policy’s cash value and death benefit, may reduce or eliminate the availability of other policy and rider benefits, and may be taxable.
Riders are supplemental benefits that can be added to a life insurance policy and are not suitable unless you also have a need for life insurance. Riders are optional, may require additional premium and may not be available in all states or on all products. This is not a solicitation of any specific insurance policy.