Permanent Life Insurance

• Life insurance is a contract between an individual and an insurer.
• The insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person.
• The fundamental objective is to provide financial security to beneficiaries.
• This covers future needs such as living expenses, debt repayment, and education costs.

Permanent Life Insurance

• Permanent life insurance is a type of policy that provides lifelong coverage, given premiums are paid.
• Unlike term life insurance, it never expires and includes a cash value component that grows over time.
• Term life insurance covers a specific period, for example, 10, 20, or 30 years.

Uses of Permanent Life Insurance

• It ensures financially dependent family members/beneficiaries have funds to cover living expenses, debts, and future needs after the insured's death.
• It helps cover estate taxes, so heirs receive their intended inheritance without needing to liquidate assets.
• The cash value can be a tax-advantaged savings vehicle, accessible through loans or withdrawals.

Benefits of Permanent Life Insurance

• Lifetime coverage is provided.
• Cash value accumulates over time.
• Premiums are fixed.
• Potential dividends are available for participating policies.

Downsides of Permanent Life Insurance

• Higher premiums than term life insurance
• Policies can be complex
• Potential for underperformance
• Surrender charges may apply

Tax Implications: Tax-Deferred Growth

• The cash value grows on a tax-deferred basis.
• No taxes are paid on earnings as they accumulate over time.
• Beneficiaries typically receive the death benefit free from federal income taxes.
• Loans against the cash value are generally tax-free, provided the policy remains in force.
• Overfunding a policy may lead to Modified Endowment Contract status, resulting in less favorable tax treatment for loans and withdrawals.

Term Life Insurance

• It provides coverage for a specific period, such as 10, 20, or 30 years.
• If the insured person passes away during this term, the insurer pays a death benefit to the beneficiaries.
• If the policyholder outlives the term, the coverage expires with no payout unless renewed.

Key Features of Term Life Insurance

• Affordable premiums
• You are only covered for a temporary amount of time
• No cash value
• You have the option to renew the policy

Limitations of Term Life Insurance

• No lifelong coverage is provided.
• Premiums increase upon renewal.
• No investment component is included.

Whole Life Insurance

• It has fixed premiums and guaranteed cash value growth, making it ideal for long-term planning.
• Some policies issued by mutual insurance companies pay dividends, increasing coverage or reducing premiums.
• It can be the most expensive type of permanent policy because of its guarantees.

Universal Life Insurance

• Adjustable premiums allow for increasing or decreasing payments as needed.
• Cash value accumulates based on market interest rates.
• Active management may be needed if cash value growth slows, where policyholders increase premiums to maintain coverage.

Variable Life Insurance

• Investments in stocks and bonds can significantly increase cash value.
• Policyholders choose how their cash value is invested.
• Cash value fluctuates based on market performance, meaning losses are possible.

Indexed Life Insurance

• Gains are tied to market performance, but policies usually have a guaranteed minimum interest rate.
• Flexible premiums and death benefits allow policyholders to adjust payments and coverage, similar to universal life.
• Some policies limit how much cash value can grow, even in strong markets, shown as cap on returns.

Accessing Cash Value

• Accessing the cash value through loans, withdrawals, or surrenders can reduce the death benefit.
• Beneficiaries will receive a smaller payout.
• Taking loans or withdrawals early can affect the long-term growth of the cash value and the policy's overall performance.
• Borrowing too much without repayment could lead to the policy lapsing, losing coverage and any remaining cash value.
• Surrendering the policy or withdrawing funds early could trigger surrender charges, reducing the cash value received.
• Charges decrease over time but are typically higher in the initial years of the policy.
• Loans and withdrawals up to premium payments are tax-free.
• Excess amounts above the basis could be taxable.
• Surrendering the policy may trigger a taxable event if the cash value exceeds paid premiums.
• Policy should be in force by making regular premium payments.

Income Approach

• Focuses on providing a replacement for the income you would have earned over time if you were still alive.
• Typically more concerned with the immediate needs of family or beneficiaries, especially in the event of your death.

Capital Retention Approach

• Focuses on maintaining and growing a pool of capital that can generate income for beneficiaries indefinitely.
• The goal is to preserve the capital so it can continue to generate income without depleting the principal.