You should look no further than the recent pandemic to question if you have the proper amount of life insurance coverage and the appropriate policy type for your insurance needs. After all, life insurance can potentially provide income and estate tax-free death benefits to your loved ones when they likely need it most. What many don’t realize is that combining different types of life insurance can make that protection both more affordable now and financially advantageous later.
To appreciate the power behind such a combination, you need to understand what the two major categories of life insurance — term and permanent — offer policyowners.
Term insurance today enjoys product design features and affordable prices as favorable as they have ever been in the history of the product. The benefit of securing term insurance today is its affordability, as well as the peace of mind that comes when immediately protecting your beneficiaries. (Related: When term insurance may be the answer)
However, term insurance will expire at a certain point or become unaffordable as the renewal rates increase dramatically, once the initial level premium period expires. That’s where the features of permanent insurance become attractive. Indeed, many term policies have a valuable feature that allows you to convert to a permanent life insurance product without medical exams.
It’s this latter point that shows the necessity of a strategic plan to be developed and implemented to ensure insurance coverage for the rest of your life.
Permanent insurance comes in many forms, but the main theme is providing coverage for the rest of your life. As Benjamin Franklin famously stated in 1789, “In this world nothing can be said to be certain, except death and taxes.” Permanent life insurance is a product that will be there when you need it.
A particular type of permanent insurance, whole life insurance, offers a guaranteed death benefit, cash value, predictable premiums, and the opportunity for dividends. Typically, whole life will offer the strongest guarantees of the permanent products available in the industry. (Related: Types of permanent insurance)
The cash value aspect can be particularly appealing, since it grows tax-deferred at a rate guaranteed by the insurance carrier. Policyowners can borrow from their cash value at any time and for any reason.1
Dividends are not guaranteed, but some carriers have paid dividends fairly consistently. MassMutual, for example, has paid dividends on participating policies since 1869.
A financial plan that includes a combination of term insurance and permanent insurance can often be the right strategy.
That’s because combining the two types of policies provides the proper amount of protection today at an affordable cost, while providing the flexibility to control your insurance future.
There are different ways to achieve such a combination.
One avenue is through the purchase of term insurance that provides for conversion to a permanent policy, like whole life insurance. And a key benefit of such convertible term insurance is that the conversion to permanent insurance can often be achieved regardless of changes in your health. (Related: Converting term life coverage to permanent)
Another route is to buy a small permanent policy early on, in addition to term coverage that provides that valuable conversion feature.
Many considerations, including age, are factored into the pricing of a life insurance policy, meaning it is more cost-effective to purchase coverage at a younger age. However, sometimes our budget won’t allow for the purchase of the proper amount of permanent insurance until later in life. But securing an initial permanent policy today, even if a small amount, will allow you to build upon that foundation.
That’s because some permanent policies, including certain MassMutual whole life policies, allow you to increase the face amount of the death benefit as you age without having to again demonstrate insurability. This is achieved through a guaranteed insurability rider or the valuable conversion feature. This allows you to add coverage without buying a totally new policy. The premiums for a face amount increase will be based on your attained age, not your application age.
The benefit of increasing your coverage on the same policy is that it allows you to grow into permanent life insurance as your budget allows. Another benefit is that it simplifies your insurance coverage by easing the administrative burden of multiple policies and adding potential cost savings by keeping the coverage contained to one policy.
Americans today have critical financial issues to address, including saving for retirement, children’s college tuition, and health care, while also paying for day-to-day expenses, such as housing, food, and child care. A life insurance policy should be part of every financial plan in the inevitable event of death. The right type of policy depends on your personal situation, but today’s products are more flexible than ever.
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1 Borrowing against cash value increases the chances that the policy will lapse, reduces the cash value and death benefit, and may result in a tax bill if the policy terminates before the death of the insured.