The Game of Life: The Value and Meaning of Permanent Life Insurance

By: Paul V. Shaheen, RHU, REBC / Vice President

“In this world, nothing is certain except death and taxes.” 

Life insurance probably wasn’t on Benjamin Franklin’s mind when he uttered his famous phrase, but as it happens, it truly can protect against both – or, at the very least, can make them much easier to deal with.

This is especially true of permanent life insurance. Unlike basic term life insurance – which stays in force for only a specified period (10, 20 or even 30 years) – permanent life coverage guarantees that your beneficiaries will absolutely be protected when you die.

How so? It’s fairly simple. Term insurance is priced purely based on age, health and life expectancy and is meant to provide a death benefit. However, permanent coverage has a cash value element, which helps you build a long-term nest egg and increase your death benefit. Further, as both grow, the build on the policy is such that you can stop making premium payments at some point down the road while still allowing the plan to grow and do so exponentially!

Here’s an example:

Say you’re a 35-year-old male, married with kids, and looking for $250,000 in life coverage. If you are in good health and a non-smoker, $250,000 in a 20-year term plan will likely run you in the area of $200 a year, whereas a permanent life insurance premium might run closer to $3,300 a year!

Whoa, that’s a big difference – why pay more? Here’s why: the $250K term will be gone in 20 years, and who’s to say he still won’t need life insurance then? Back in the day, folks used to think they only needed coverage while they were young, raising kids and had a mortgage, and by 65, they’d retire and live happily ever after and forever financially free. The world’s changed a lot in the last 50 years, hasn’t it?

People are living and working longer while carrying all sorts of debt into their later years, be it second homes, cars, etc. But even devoid of debt, many folks, especially those with wealth, may desire to leave as much of that wealth to their families as possible. This is where permanent coverage can be beyond valuable!

Meanwhile, let’s go back to our 35-year-old male. If ALL he bought were term insurance, he would have paid $4,000 in premiums over 20 years and, at the end of 20 years, have little to show for it. Whereas if he paid $66,000 in premiums over 20 years with permanent (whole life) insurance, he’d have (a projected) $336,000 in coverage as well as $84,000 in cash value, and if he kept paying premiums into the plan (i.e., investing into the plan), he’d have $409,000 in life coverage and $180,000 in cash value by the time he turned 65.

Not only that, but the money would work for him in many tax-advantaged ways:

• Proceeds from life insurance are always tax-free.
• So is the cash value inside your policy, which you can withdraw (via loan) and NEVER have to pay back, nor EVER pay tax on, no matter your long-term gain.
• Not only is your cash value tax-free, but it’s also a non-reportable asset. That means it doesn’t count as income for things like FAFSA, Medicare taxes or even in determining what you pay for Medicare – whose premiums have been means-tested for over ten years. Further, your cash value is always protected from creditors and debtors in case of financial hardship or bankruptcy.

So, does this mean you should never buy term life insurance? Does this mean you should stop what you’re doing and invest all your money into a permanent life insurance plan? Of course not!

First off, when you are at your greatest area of vulnerability, such as our 35-year-old married male, or say for you and a partner who want to ensure the long-term sustainability of your business should one of you die young, term insurance is the smartest and most inexpensive way to get all the death benefit coverage you need at the most affordable cost.

The idea is this: buy what you need in term, but then consider putting some of your insurance dollars into permanent coverage to ensure you will be covered much later in life.

As for investing, there are many places where you should put your money to help maintain a strong and balanced retirement portfolio, such as stocks and bonds, your 401K, Roth IRAs, treasury notes, etc. But as world-renowned accounting firm Ernst & Young postulated two years ago, those carrying permanent life insurance as PART of their overall investment strategy tend to do better than those who don’t. Why? Generally speaking, E&Y argues the safety and security of the permanent life insurance investment is a hedge and protector against the inevitable (and cyclical) uncertainties of the overall investment market.

Now, permanent coverage comes in many flavors, such as whole life, universal life, and even variable universal life, all of which have their strengths depending on your specific needs. Whole Life earns a safe and conservative long-term return via annual carrier dividends (as if you were a stockholder of the company). Universal (and variable universal life) puts money into the marketplace, typically more aggressively, and can bring higher rewards but come with higher risks. That said, many use universal life to create a permanent term, where there’s no cash value but instead provides a path whereby you pay a minimum guaranteed premium every year to guarantee coverage for life. 

Perhaps life insurance may not bring about the “constitutional promise of permanency” Benjamin Franklin once ruminated about. Still, it can protect your family and keep as much money in your and your family’s pocket for as long as possible.

Sounds better than death and taxes.