Karin Grablin: Permanent life insurance could be worth second look

Life insurance, first and foremost, helps loved ones cope with the adverse financial effects of someone dying too soon. Many of us likely have some type in place, and I would venture to say most have term life insurance, which is a policy that lasts for a fixed length of time and then expires.

But there’s a second type available, known generically as permanent life insurance that’s usually designed to last a lifetime, comes in many forms with varying features and benefits, and has the potential to meet more financial planning needs than just providing a death benefit.

Here are some not-so-well known benefits:

TAXES

Death benefits paid to beneficiaries on all life insurance policies are generally not taxable income. In addition, permanent life insurance has a cash value component to it, like a savings account, which over time usually grows tax-deferred. Why does that matter? Because the policy owner is able to access that cash value during his/her lifetime on a tax-advantaged basis, through withdrawals or policy loans.

Generally, cash value withdrawals are tax free, up to the amount of premium paid into the policy, known as the cost basis. Loans made from policy cash value (beyond cost basis) to the policy owner usually are not taxed, either. This assumes the policy remains in force until the insured’s death. Properly structured, these cash values can be accessed to provide a consistent stream of retirement cash flow on a tax-advantaged basis.

However, tax results depend on each situation. For example, withdrawals over cost basis are taxable, so it’s important to work with a qualified professional to structure these cash flows to avoid adverse tax consequences.

INFLATION

For more than 100 years, the average inflation rate in the United States was just over 3 percent. Some types of permanent life insurance offer non-guaranteed interest rates of 4-5 percent (or higher) on the cash value. Over time, the interest credited to these cash values could outpace inflation. Combined with tax benefits on that growth, a permanent life insurance policy can be an attractive supplemental retirement investment.

MISTAKES

When financial mistakes happen, it may be good to know that the cash value inside a permanent life insurance policy can be accessed for any reason (not like hardship withdrawals from an IRA), and likely on a tax-advantaged basis.

EMERGENCIES

Similarly, if an injury, disability or chronic illness happens, the cash value inside a permanent life insurance policy is there to help. Furthermore, many policies offer riders that provide additional benefits should a disability event or long-term care need occur. These riders may waive the policy premium, or advance a portion of the death benefit to cover expenses associated with a long-term care event – another great risk to manage against in retirement.

While permanent life insurance isn’t for everyone, it certainly deserves a second look for those who have more complex financial planning needs than just providing for loved ones. A qualified financial planning professional should be able to help evaluate how the benefits of permanent life insurance may apply to you.

This story was originally published November 7, 2016 at 12:20 PM with the headline "Karin Grablin: Permanent life insurance could be worth second look."