Consequently, some consider life insurance a necessary “lost” cost. Individuals with dependents and limited assets need the immediate financial protection term insurance provides in the event of an untimely death. You keep the coverage until it is no longer affordable or necessary, and then let it go.
Constructing a “Lifetime” Term Insurance Plan
But there are individuals with legitimate reasons to have an insurance benefit in place until they die, whenever that might occur. How does one construct a “lifetime” term insurance program?
The simplest is buying whole life insurance, a level premium policy with a term guaranteed for however long one might live. Just like shorter level term policies, this means overpaying at the beginning and underpaying in later years of the policy. But whole life is more than a lifetime level term policy. Because the premiums are higher and will be paid for a longer time, the insurance company credits the policyowner with equity in the insurance benefit in the form of cash values, some of which are guaranteed and some not, such as company dividends.* Cash values can be accessed, if needed, before death as withdrawals and/or loans.**
An Example of a “Lifetime” Life Insurance Plan
In the case of the 45-year-old with $500,000, the annual level premium for a whole life policy from the same insurance company is $10,010. This is 10 times the 20-year level term premium, but also less than the $14,000 that would have been required to conservatively “replace” the term policy with savings. This is not a perfect apples-to-apples comparison, and whole life is not the only way to construct a life insurance program that provides lifetime protection. But the whole life policyowners have guaranteed options to maintain the insurance benefit as long as it is needed, and that’s important. Ideally, the boundaries and end of the life insurance coverage should be controlled by the policyowner, not the relentless cost curve of annual insurance costs.
A sports cliché says “It’s not how you start, but how you finish.” Is your life insurance program designed to end on your terms? If not, consider contacting us today.
*Dividends are not guaranteed and are declared annually by the company’s board of directors.
**Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.