What should you know about permanent life insurance?
April 24, 2018 by Casey Dowd
Life insurance can be an unpopular discussion at a cocktail party, but for Baby Boomers nearing or in retirement, it is something to talk about. Learning about the changing life insurance category and how innovations and new options provide some real benefits for Boomers retirement planning.
According to Allianz Life’s 2018 Life Insurance Needs Survey, the majority of Americans are still unsure about the full benefits of permanent life insurance and undereducated about the living and tax benefits available with this product.
Paul Kelash, vice president of Consumer Insights for Allianz Life Insurance Company of North America discussed with Fox Business the benefits that exist with newer permanent life insurance products.
Boomer: Why is it important for Americans – particularly boomers – to know about all of their options when it comes to life insurance?
Kelash: Protection – meaning risk management and insurance – has always been an important concept within financial planning, but one that may get less attention than other core planning topics such as investments, tax strategy and retirement. Although “guarding against uncertainty” should be the base of every financial plan, less tends to be written about insurance as the cornerstone of a sound financial strategy. Therefore, most Americans don’t know as much as they should about all of the benefits life insurance can provide.
The main reason to get life insurance is to provide a financial benefit to loved ones in the event of an early or unexpected death – and most people seem to get that. In fact, according to the 2018 Life Insurance Needs Survey from Allianz Life, nearly nine in 10 people said they understand the death benefit component of permanent life insurance. Yet, more than half are unsure or don’t believe cash value from permanent life insurance can be used to help with a variety of financial needs, including funding college education and supplementing retirement income. Furthermore, a full two-thirds are unsure or don’t believe benefits paid from life insurance are not taxable.
This is concerning, particularly for boomers who should be taking advantage of all methods available to enhance their retirement portfolio or help build a legacy for their beneficiaries.
Boomer: What is permanent life insurance and how does it differ from a term life policy?
Kelash: Term life insurance, which most people are familiar with, provides protection for a specified period of time. Once that time period is over, the policy terminates. Many people have life insurance coverage through their employer, and most often this is term insurance.
A permanent life insurance policy does not expire during a set term. In addition to death benefit protection, this type of insurance policy has the potential for a cash value accumulation. Any available cash can be withdrawn or taken as a loan and be used to cover unexpected expenses or help meet a financial goal such as paying for college, buying a home or supplementing retirement income.
Over the past 5-10 years, the insurance industry has created new, innovative options for consumers, but our survey makes clear that people don’t have all of the information about their options. For example, fixed index universal life insurance is a newer type of permanent insurance that provides the opportunity to accumulate cash value based on positive changes in an external market index or a fixed interest allocation. This allows for greater accumulation potential as compared to traditional universal life insurance. A built-in annual floor in the policy ensures the cash value will not decrease due to market volatility as the cash value is not directly invested in the market.
Boomer: Can a term life policy be converted into a permanent life policy?
Kelash: Some term policies are convertible, which means the policy owner can change the policy to a permanent one under certain conditions and within a certain time frame. Boomers with life insurance coverage should make sure they understand the type of policy they have and whether or not they have the option to convert.
If their policy is convertible, they should work with a financial professional to determine if converting to a permanent policy would be a good idea for their specific financial situation. For example, if the consumer needs additional retirement income, it might make sense to convert the policy and use any available cash value to meet those needs.
Nearly 95% of respondents in our survey said the ability to save enough to retire comfortably was a top priority when planning for their financial future. It’s clear that Americans need a diverse mix of financial products, including life insurance, to help them achieve that goal.
Boomer: What are the tax advantages with a permanent life policy?
Kelash: Our survey asked what people find most valuable in financial products. Eighty-five percent of respondents said one that “provides a source of tax-free income in retirement,” followed by 78% who value one that “provides tax-free money for family/loved ones.”
Tax efficient strategies are an essential part of financial planning, so it’s important that people include life insurance solutions in the overall conversation. A permanent life insurance policy provides three distinct tax advantages – tax-deferred cash value accumulation potential, income-tax-free loans and withdrawals and, of course, the income-tax-free death benefit. Any or all of these can be a real benefit when considering future financial needs.
Too many Americans with significant retirement assets are not optimizing their financial strategy because they simply don’t know all of their options. That needs to change. Life insurance can truly be the engine that helps drive a well-rounded financial strategy – providing both the protection and the flexibility necessary to help navigate an uncertain financial future.
