WHILE MOST FOLKS don’t continue term insurance into retirement, permanent insurance is designed to provide lifetime coverage. Also known as cash-value life insurance, a permanent policy involves far higher premiums, because part of each premium goes into an investment account. When you die, the investment account’s cash value is used to pay the policy’s stated death benefit. If the cash value is less than the death benefit, the difference is paid by the insurance company and represents pure insurance, just like a term policy.
In the early years of a cash-value policy, not much of your premium payment gets added to the cash value, partly because the salesperson’s commission comes out of those early payments and partly because so much pure insurance needs to be bought. But as time goes on, more and more of each premium payment gets put toward the cash value. This is reminiscent of a mortgage with its shifting mix of principal and interest.
Thanks to the buildup in cash value, you don’t have to buy so much pure insurance when you’re older and life insurance becomes so much more costly. Result: Cash-value life insurance can be affordable in old age, while term insurance isn’t.
The proceeds from a life insurance policy are income-tax-free to your beneficiaries. What if you need to tap into a cash-value policy during your lifetime? You may be able to withdraw a sum equal to the amount you put into the policy, with no taxes owed. Alternatively, you could take out a policy loan, though the loan will likely charge an interest rate that’s higher than the return your cash value is earning. Both withdrawals and any loans outstanding at your death will reduce the policy’s death benefit.
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