Most of us know that life insurance pays a lump sum upon your death. Some policies are temporary and bought in case you die unexpectedly (think mortgage protection, young kids, etc), while others are permanent and bought to assist with estate plans, liquidity, funerals, legacy and so on…because we all know we’re going to die one day, right?
Unlike temporary (aka term) policies that have increasing premiums over time and an expiry date…that is usually before you’re expected to expire; permanent policies have level premiums that start higher but end up less expensive in the long run and the policy only “expires” (meaning pays out) when you do.
BUT permanent policies can do more than JUST provide you with a death benefit when you die. They have savings capacity where extra premiums paid can grow within the policy on a tax-sheltered basis. These extra premiums can offset future premiums, increase the death benefit and/or be accessed in your lifetime in a number of ways.
Let’s look at Mary, a 45-year old female who doesn’t smoke and wants $500,000 of life insurance. The basic premium is $4330/yr for life. However, Mary doesn’t want to pay premiums forever, so she increases premium to $14,880/yr with the expectation of paying for 20 years. Here is how the policy is expected to grow with this extra money going into it:
- Age 65, death benefit is $1M and cash value is $246K, premiums are stopped,
- Age 75 death benefit is $1.4M and cash value is $921K, despite no further contributions,
- Age 85 death benefit is $1.9M and cash value is $1.5M!
We all know that if Mary dies the death benefit will pay out, but the title of this blog is that life insurance can be MORE…so let’s talk about how to access the cash in Mary’s lifetime if she discovers she needs extra income. There are several ways to do this, but the only tax-free option is a collateral loan.
The cash value can be used as collateral to access a line of credit, similar to a line of credit against your house. Except you can access up to 90% of the cash value rather than only 75% on your home. Upon death, the tax-free death benefit is used to pay off the line of credit, with the remaining death benefit going to your beneficiaries.
Taking the example above, if Mary needs extra money from age 75-85, she can access a line of credit and take an income of $109K tax-free for the next 10 years. Assuming she passes away at age 85, the loan plus accumulated interest at 4%, is paid off using the death benefit with the remaining $545K being payable to her beneficiaries.
Not too shabby…an investment of $297,600 provided $1,090,000 of income plus $545,000 at death, totaling $1,635,000 of value. Who knew life insurance was so awesome?…you guessed it…the cool nerds at Zavitz Insurance.