REASONS TO BUY PERMANENT INSURANCE
Whole Life Insurance is an important asset, and like all investments, it should be reviewed regularly. In fact, it needs more attention than traditional investments because it serves more purposes than a single investment in your portfolio.
- 1. Death benefit to protect your family’s financial well being.
- 2. Tax-exempt income to help fund retirement.
- 3. Long-term financial commitment with a four or five-figure annual premium.
- 4. Estate planning to support special needs children and leave a tax-efficient legacy.
Life insurance is a complex product, and many details are often overlooked during a sales pitch. While whole life insurance can meet the roles above, the details of the policy can undermine its benefits. High loan rates, limited investment choices, premium stoppage, restricted access to cash value, and taxes can prevent the policy from fulfilling its promises.
Whole Life Insurance: Facts and Misconceptions
- 1. "The policy pays for itself."
This isn’t as simple as it sounds. When the cash value growth exceeds the annual premium, people may stop paying the premium, thinking the policy is self-sustaining. However, this often involves borrowing from the cash value to cover the premium, which accumulates interest. Over time, the interest charged is usually higher than the dividends earned. This can reduce the policy's value and eventually cause it to lapse, leaving no death benefit. If the policy lapses, there may also be a significant tax bill, as premiums paid through loans can be treated as income.
"Pays for itself" is misleading. Borrowing money to pay premiums incurs interest. Over time, the policy loses value, and if it lapses, taxes could be catastrophic. The decline starts when the policy still has significant value, but that value gets wasted.
- 2. "The cash value is accessible tax-free." Only the death benefit and the basis (the total premiums paid) are tax-free. Other withdrawals may be subject to income tax or interest.
- 3. "The best way to access the value of whole life insurance is through the death benefit." The death benefit is paid income tax-free, but if you’re buying or keeping whole life insurance just for this, it’s worth reconsidering. Whole life insurance is one of the most expensive ways to get a death benefit, and there are often better alternatives.
- 4. "The cash value is 100% accessible." This isn’t true if you want to avoid taxes and keep the death benefit. You can access money through a loan, but if the policy lapses, you may owe taxes on all the earnings. Insurance companies only allow part of the policy’s value to be accessed. This reserve is based on the loan rate, dividend rate, and your life expectancy. A high loan rate and long life expectancy will reduce the percentage of cash you can access.
LLife insurance is complicated and hard to navigate. At Triathlon Partners, our goal is to engage, educate, and empower. We’ve researched the products available and understand which policies offer low loan rates, good investment options, and flexible premium terms. Let us review your current policies and financial goals. Our analysis has shown significant financial benefits for our clients.
When suitable, alternative strategies can lead to impressive results. Restructuring a $1 million policy, for example, can add hundreds of thousands in future tax-exempt income or substantially lower premiums without reducing the death benefit.
Contact Triathlon Partners to discuss how we can maximize your life insurance strategy. A 15-minute conversation could have a big impact on your financial future.
Additional Resources
TriathlonPartnersTV:Structured Notes introduced and explained
July 2024 Structured Notes: Don't be concerned about buying stocks at the high, they have you protected
Triathlon University: Structured Notes 201
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