Life Insurance Begins at Age Fifty
If your
term life insurance policy is ending but your needs continue, consider the cash
value alternative of permanent life insurance.
One way to continue your life insurance is simply to renew your term
protection; however, if your health has changed, you may be limited on the type
of policy you can buy. A permanent life
insurance policy, or whole life policy as some call it, may provide a steady
investment. In contrast, many people
believe whole life insurance as an investment is controversial, but that is
because it takes many years for a policy to show value. The first years’ premium goes largely toward
commission and other expenses, so your cash value will lag the amount paid in
premiums in the early years. It
typically takes eight to ten years for your cash value to exceed the premiums
you pay. If you carry on, however, the
results improve—sometimes dramatically.
This is a long term proposition.
Do not buy it if you cannot keep it.
From 1991 to the start of 2011, according to Blase Research (a life
insurance data provider from Easton, PA), annualized cash value returns for
representatives from major companies such as Northwestern Mutual and New York
Life in private range from 2.62% to 4.44%.
This amount is tax deferred and includes the part of your premiums that
go to pay for death protection and company expenses. It is also a good idea to see whether you can
convert your term policy to permanent insurance without changing insurers and
without a new physical exam, especially if you have developed medical
conditions that were not present when you purchased the life insurance
originally. Clearly earnings on life
insurance policies will not keep up with stocks over a lifetime and certainly
not with an extended bull market. This
is why just about every financial advisor, including well-trained life
insurance agents, emphasize that life insurance is not meant to be your primary
investment. Tom Newsad advises everyone
to have a comfortable emergency reserve savings or tax deferred
investment. Remember that permanent or
whole life insurance has a few strong suits, the first of which is safety. With the exception of AIG, life insurers
survived the credit crisis and the recession in excellent financial
condition. The next strong suit
mentioned is that falling costs, competition, and longer life expectancies are
driving the cost of all life insurance policies down, including those for people
aged fifty and older.
Permanent
life insurance also appeals to risk-adverse people who do not have time to
recover investment losses in the event of another financial crash. Another form of whole life or permanent life
insurance protection is a type of whole life policy called limited pay. You may pay higher premiums for fewer years,
but it is an option that has become popular among pre-retirees who want to time
the end of their premium obligations with their retirement date. Cost could range perhaps twice as much per
year versus regular premiums paid over one’s lifetime, but by putting more into
the pot earlier cash value also compounds quicker.
Cash value
life insurance can also be a good portfolio diversifier. That is because a whole life policy is
unconnected to the securities market. You can think of it as cash or bond allocation
in your overall investment nest that allows you to become more aggressive with
stocks, commodities, or real estate in your IRA and 401(k) or taxable brokerage
accounts. Cash value life insurance is
also one alternative to home equity line of credit or other sources of borrowed
money. That is because the money you
usually borrow from your whole life insurance policy is not taxed (remember,
whole life insurance policies are the only vehicle that you can borrow money
out of and not have to pay taxes on). A
policy loan is instant credit. You can
borrow up to your total premiums paid with no questions asked, simply by
sending a fax or sending the insurance company a check at the office of Newsad
Insurance Services. A simple phone call
or email starts this process for you.
Besides speed, there are two huge advantages to CDs and conventional
loans, and that is that nobody runs a credit check or ties the interest rate to
your credit score, and that you do not have to repay the money on any
schedule. There is also no penalty if
you want to make a withdrawal at or before age 59 ½ because it is not a taxable
event like a withdrawal from an IRA or a 401(k). Policy loans are not a totally free ride,
however. They tend to acutely accumulate
interest at 5% to 8% in your unpaid principal and accrued interest is deducted
from the death benefit paid to your survivors, or from the cash value taken
away if you discontinue the policy.
Ultimately,
what is most important here is that the money accumulating in your policy is your money. You also will not have to beg a banker to
approve a loan after you have retired and have a lower income.
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