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The primary purpose of life insurance is to protect your dependents and their standard of living. In a "permanent" life insurance policy, such as whole life or universal life, you also can build cash value as part of your personal planning. After cash value accumulates, it can be accessed for liquidity or income needs, including college tuition or retirement. Of course, you also have many other ways to build assets over time. So, your decisions may depend on understanding the four major reasons to do so through life insurance.
Reason 1: Disciplined Cash Value Accumulation In some types of permanent life insurance, you can increase cash value methodically with each premium payment. A portion of each payment is applied to the cost of insurance protection and other expenses, and another part increases cash value. You can even have premium payments transferred automatically from your bank account, if you wish. Since most people are not inclined to access their life insurance policies for casual or impulsive spending, this discipline can help you pursue long-term goals, little by little.
Reason 2: Guaranteed Safety In permanent life insurance, the life insurance company guarantees the cash value of the policy. That makes this type of life insurance useful for accumulating assets that you can't afford to lose, or don't want to risk.
Reason 3: Tax Advantages Any increase in cash value is not currently taxed. Most policies offer "partial surrenders " that allow you to withdraw part of your cash value permanently. Such withdrawals are considered an untaxed return of your premiums, provided they do not exceed the total amount of premiums paid. Only after withdrawals exceed total premiums paid are they considered taxable income. Finally, a death benefit paid to your beneficiary is not subject to income tax.
Reason 4: Coordination By accumulating cash value in your life insurance policy, you coordinate two important parts of your financial planning — asset accumulation and insurance protection. In some life insurance policies, it's possible to link your death benefit (face value) to cash value growth so that insurance protection increases dollar-for-dollar with asset accumulation.This can help the insurance protection keep pace with inflation. Your financial professional can help you evaluate the benefits of accumulating assets through life insurance. Here's the good news: You can participate in life insurance along with other appropriate financial solutions, and still receive continuing financial guidance through one professional who understands your needs.
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