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"When thinking about everyday finances, life insurance is not top of mind for most Americans," says NAIC Vice President and North Dakota Insurance Commissioner
The NAIC survey found that 63 percent of consumers have life insurance. There are two main types of life insurance: term and permanent. A term life insurance policy pays if the insured dies during the "term" of the policy. Permanent life insurance, the type of policy that offers investment features, combines the death benefit coverage of a term policy with the investment component that can build cash value over time. Some permanent policies also include provisions for policyholders to access money immediately for any reason.
Life Insurance as a Source of Emergency Cash
With permanent life insurance policies, a portion of the money you pay into your premium goes into a cash value that grows over time, and if managed correctly, may include tax benefits.
"If you own permanent life insurance, you may be able to take out a loan against the value of the policy, provided you have been paying premiums for a pre-determined length of time," says Hamm. "There are no requirements for using these funds and the interest rate on this loan may be cheaper than borrowing against a 401K or maxing out a credit card. There also may be tax benefits, since the cash from this type of loan typically is not considered income by the
Another option for quick funds may be to cash in a permanent life policy, which allows you to immediately retrieve up to the entire accumulated value. But doing so should only follow careful consideration because life insurance premiums increase with age. This option is most viable for individuals who already have sufficient term life insurance or who no longer have financial dependents.
Life Insurance as a Financial Tool
For Americans worried about the recent stock market volatility, permanent life insurance may present a lower-stress way to put aside money for the future. The dollars that go into the investment channels of these policies (beyond the costs of the insurance) accumulate interest each year. And insurers typically guarantee a minimum return of at least three to four percent a year.
Almost half of respondents to the NAIC survey said low risk and tax-advantaged growth were priorities when investing in today's volatile market and both are features of some permanent life insurance policies. Additionally, 65 percent of survey respondents did not know some types of life insurance include a dollar amount that is guaranteed to increase in value and may provide tax benefits.
With the value of retirement accounts down, permanent life insurance policies that build cash value may be a way to add stability to a financial portfolio and accumulate funds over the long-term. These policies also can offer tax advantages to small business owners or individuals who have maxed out their qualified retirement plan contributions.
Permanent Life Insurance Options
There are four types of permanent life insurance — whole, universal, variable and variable universal. Unlike term insurance, all permanent policies remain in place as long as the premium is paid. They also all have a cash value component that increases over time, and allows the owner to borrow against that cash value. Below are the main differences between these permanent policies:
- Whole life insurance policies offer a fixed premium for the duration of the policy, guaranteed annual cash value growth, and a guaranteed death benefit. They do not provide investment flexibility and it is not possible to change the policy coverage once established.
- Universal life insurance is more flexible than whole life insurance, letting the policy holder determine the amount and timing of premium payments (within certain limits) and adjust coverage levels as needs change. Like whole life insurance, there is a guaranteed annual cash value growth and no investment flexibility.
- Variable life insurance allows the policy holder to allocate funds across stocks, bonds or money market accounts with different levels of risk and growth potential. A minimum cash value is not guaranteed because of market fluctuation and coverage amounts cannot be changed. Variable life insurance exposes the policy holder to greater market risk, but has the potential for greater long term returns compared to whole or universal life insurance policies.
- Variable universal life insurance is a combination of variable and universal life insurance and is the most flexible form of permanent life insurance with the ability to vary premium payments, investments and coverage amounts. It allows investment in a variety of market products chosen by the policy holder and may allow policyholders to make tax-free transfers among investments. Variable universal life also exposes the policy holder to greater market risk than whole or universal life policies.
Purchasers should consult a licensed investment or tax advisor for guidance on which permanent life policy best fits an individual's risk tolerance and investment objectives. For more tips and resources about life insurance, visit Life.InsureUOnline.org, or find your state insurance commissioner at http://www.naic.org/state_web_map.htm.