Joseph Yocavitch
LUTCF®, CLTC®

Term life insurance better than permanent life insurance or vice versa.

Too often we spend time weighing in as to whether term life insurance is better than perm life insurance or vice versa. While it is essential that we sell life insurance as “life insurance,” its features are the key to finding the right policy for your client.

Benefits of Permanent Life Insurance

Permanent life insurance has more combined benefits than any other product available to consumers.

Permanent life insurance offers three primary benefits.

  1. Cash value. Permanent policies generate cash value that accrues over the policy’s life. Policyholders may borrow against the policy, cancel it for all/part of the cash value while alive, and receive favorable tax treatment.

  2. Permanent coverage. As its name implies, permanent life insurance provides a lifetime of coverage at a steady premium throughout the entire policy.

  3. Retirement/estate planning. Permanent life insurance is highly suitable for retirement/estate planning because the policyholder cannot outlive the policy.

 Tax-deferred growth. As premiums are paid in, the interest earned grows tax deferred.

 Tax-free distribution. When a death benefit is paid to a beneficiary, it is distributed on a tax-free basis.

 Competitive Return. While the “returns” (i.e. interest earned) don’t typically reflect the stock market, they are competitive when compared to savings accounts, money markets and CDs.

  High contributions. Although savings accounts, money markets, CDs and brokerage accounts are not restrictive in the amount of money that can be contributed on an annual basis, when loosely compared to IRAs and 401(k)s, permanent life insurance is generous on the amounts that can be contributed.

  Collateral opportunities. There is a leveraging effect offered within permanent life insurance. Without much fanfare, the owner of a permanent life insurance policy can use it as collateral for other funding scenarios.

  Guaranteed loan option. One of the most agonizing situations to be in is submitting a loan package to a bank and being rejected.  Without fail, the owner of a permanent life insurance policy is allowed to borrow against the death benefit unencumbered.

  Unstructured loan payments. In the event that the owner of the policy takes out a loan, with minimum conditions, they have absolute control on the amount and frequency of the payments back into the account.

Benefits of Term Life Insurance

There are four significant benefits of term life insurance.

  1. Low premiums. Term life insurance provides the greatest coverage for the lowest price and, as mentioned, premiums are guaranteed for the length of the term. Additionally, the younger you are when you purchase term life insurance, the lower the premiums will be. Further, there are no hidden fees, risks or exclusions. You will know exactly what your premium payment will be for the length of the term.

  2. Guaranteed renewability. As long as premiums are paid on time, policies are renewable without having to take another medical exam. In fact, some term life policies are guaranteed renewable to age 95 and beyond.

  3. Many carriers will allow policyholders to reduce the amount of the policy should their income or needs change during the term.

  4. Conversion options. Most term policies can be converted to a permanent life insurance plan. However, the amount of benefits allowed in the new plan depends on the selected plan. Further, premiums will vary depending on the amount of benefits selected. Finally, riders and other conversion provisions are subject to additional costs.


Proper tax planning should do two things: reduce your taxes while you are alive, as well as after you die. Permanent life insurance gives you the potential to cover these two bases at once - you can transfer your assets income tax and estate tax free to beneficiaries and also build up tax-deferred growth of cash inside the policy.

Your Beneficiaries
When people think about life insurance, they generally envision how it will help those they leave behind. So, first let's talk about what life insurance does for your family. It can let you pay for a child's future college education, provide a retirement fund for your spouse, or simply make sure your survivors have the money to live the lifestyle you want for them.

Life insurance gives you the ability to transfer a policy's death benefit income-tax-free to beneficiaries. No matter how big the death benefit is - $50,000 or $50 million - your beneficiaries won't pay a single cent of income tax on the money they get. What other investment does that?

For instance, beneficiaries can get walloped by the IRS when they inherit IRAstax-deferred annuities and qualified retirement plans. They could end up losing up to 35 cents out of every dollar you leave them to federal income tax.

This is not the case with life insurance. Also, life insurance guarantees that your heirs will get that money

What's in it for you?

The mounting federal deficit, the long-term healthcare crisis and the uncertain future of Social Security and Medicare have put the government safety nets deep in the hole. And it's probably not going to get better during your lifetime.

But you can take comfort in knowing that the tax-deferred growth of cash inside a life insurance policy is not vulnerable to the whims of the people who run Social Security and Medicare. This is money that you could use to supplement your retirement income, pay for medical care, or whatever you wish - regardless of what the government does.

That's not all. If you are collecting Social Security income, you might not know that could have to pay income tax on up to 85% of those benefits. Also, most taxable income, and even tax-free municipal bond interest, is counted when determining how much of your Social Security you can lose to the IRS. This is not the case with life insurance. Earnings that grow within a life insurance policy are one of the few items that will not increase the tax on your Social Security income.

 

JML Financial Group does not offer legal or tax advice.  Please consult the appropriate professional regarding your individual circumstance.

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