Life insurance can play many roles throughout one’s life and beyond. Let’s take a look at some of the most popular, as well as some of the most overlooked, living benefits of life insurance.
Many consumers are familiar with the concept of term life insurance: pay a regular premium amount for the initial term period of the policy, and in return, receive a guaranteed level of protection. “Term life insurance is viewed as a ‘pure protection’ product,” says Marty Flewellen, the chief distribution officer for Transamerica’s Life & Protection division, and as a result, some people conclude that life insurance only benefits their loved ones — and only if the policyholder is no longer there.
The reality, fortunately, is far more optimistic.
In particular, permanent life insurance — that is, life insurance that holds an accumulating cash value – is a flexible and unique asset that can protect a family’s lifestyle and also can help supplement retirement income as well as provide financial assistance in the case of unexpected emergencies.
Additionally, policy riders — optional benefits available when you apply for a policy — hold the key to realizing some of the most popular living benefits available with permanent and term life insurance policies.
Finally, many people worry about the financial challenges their children and grandchildren face, today and in the future. “These are the concerns that keep people up at night,” says Flewellen. “Life insurance is uniquely qualified to address those concerns, providing a generational safety net that lasts beyond the policyholder’s lifetime.”
Consider just six of the ways life insurance can benefit you during your lifetime:
1) Your permanent life insurance policy’s cash value growth is tax-deferred.
As a permanent life insurance policy grows over time, any gains are tax-deferred.
2) You can access the cash value of your permanent life insurance policy via tax-free loans and withdrawals.
Through loans and withdrawals, a permanent policy can serve as an important safety net during your working years.
When the policy value is sufficient, you can borrow against your policy tax-free, often at a lower interest rate than available at a bank. No credit check is required, and your repayment history does not impact your credit. You can also withdraw funds tax-free up to your basis, which is the total of your premiums. Withdrawals exceeding that amount are taxed as income.
As long as a policy’s value is sufficient, you may be able to access its cash value. However, accessing the cash value of your policy can reduce the policy’s death benefit, increase the possibility of policy lapse, and trigger tax liability. Your insurance agent can help you determine the best course of action, and help you actively manage your policy to avoid problems.
3) Your permanent life insurance policy can serve as a source of supplemental retirement income.
Your life insurance policy can become a supplemental asset for your use in retirement. Loans and withdrawals from a permanent life insurance policy can be a planned source of supplemental income, if the policy is designed to achieve that goal.
4) You can access your life insurance policy’s death benefit for chronic or critical illness — even with term life insurance.
Some life insurance policies offer riders that allow you to access a percentage of the policy’s face amount as a lump sum payment for a qualified critical or chronic illness. Taking advantage of this option typically terminates the policy’s death benefit protection, but it can provide you and your family with essential cash during a stressful time.
5) You could receive a refund of any premiums paid if you cancel a life insurance policy.
That’s right — some permanent life insurance policies offer what’s known as a return of premium rider, allowing you to receive up to 100 percent of your premium back tax-free if you decide to cancel the policy. This rider allows you to enjoy the benefits of life insurance protection, at no risk to you if the policy no longer meets your needs. Even some term life insurance policies offer it as part of the policy itself, if you outlive the covered term period.
6) You can structure a life policy’s death benefit to pay your beneficiary in monthly payments, or in a combination of lump sums and monthly payments.
Admittedly, this last example is not technically a living benefit — but only if you think peace of mind is not a living benefit.
Flewellen says, “Transamerica’s research has found there’s one thing that keeps people up at night — whether they’re affluent or living paycheck to paycheck. And that is, ‘Who will help my children and grandchildren when I’m not around?’”
A traditional lump sum death benefit can be difficult for beneficiaries to manage consistently over time. So Transamerica developed the income protection option allowing the policy to pay beneficiaries in guaranteed monthly payments for a specific period of time. It even allows the policyholder to specify a combination of lump sum payments and guaranteed monthly payments.
“Many of the people we studied had adult children who were struggling financially,” says Flewellen. “The more affluent were providing financial assistance to them, while those of more limited means were assisting with things like housing, groceries and day care. But when we asked them all the same question, ‘What keeps you up at night?,’ we were surprised to find the answer was the same for both groups.”
Flewellen says the common answer reflected a larger worry: that the economic opportunities they had enjoyed were no longer available to their children and grandchildren.
“It’s a concern life insurance is uniquely qualified to solve,” argues Flewellen, “if we build the right products.” He sees the income protection option as a legacy-building tool, enabling policyholders to extend the multigenerational safety net beyond their own lives.
“At the end of the day,” says Flewellen, “life insurance allows us to prepare a safety net for our loved ones in the future, and to do it on a guaranteed basis. No other product besides life insurance can do that. It’s that simple.”