Lifetime Life Insurance: Is It Possible?

Life insurance is a way to protect your family and those who depend on you for financial support. It is a contract in which a policyholder pays premiums in exchange for a lump-sum death benefit that is paid to the policyholder's beneficiaries upon their death. There are two primary categories of life insurance: term life and permanent life. Term life insurance covers the policyholder for a fixed period, such as 10, 20, or 30 years, while permanent life insurance provides coverage for the entirety of the policyholder's life. Permanent life insurance policies also have a cash value component, which allows the cash account to grow into a sizable asset that can be borrowed against, used to pay premiums, or surrendered for cash to fund retirement. While term life insurance is generally more affordable, permanent life insurance offers lifelong coverage and the opportunity to build cash value over time.

Whole life insurance

The death benefit is guaranteed, but the payout will be reduced if there are outstanding policy loans when the policyholder passes away. The death benefit can also be affected by certain policy provisions or events, such as unpaid policy loans.

Universal life insurance

One of the main advantages of universal life insurance is its flexibility. The policyholder can increase or decrease their death benefit and adjust their premiums to fit their changing needs and circumstances. The cash value of a universal life insurance policy can also be accessed in several ways, such as through withdrawals, loans, or by surrendering the policy.

However, there are some disadvantages to universal life insurance. The policyholder needs to carefully monitor the cash value, as underperformance or underpayment may affect the death benefit or cause the policy to lapse. Additionally, some withdrawals from the policy may be taxed, and the cash value is lost at the policyholder's death.

When choosing between universal life insurance and whole life insurance, it is important to consider your goals and circumstances. Universal life insurance offers more flexibility in terms of premiums and death benefits, while whole life insurance provides more stability with fixed premiums and a guaranteed death benefit.

Term life insurance

Features of Term Life Insurance

• Choice of Term Length: You can choose the term length that suits your needs and lifestyle. The most common options are 10, 20, or 30 years, but some companies offer terms ranging from 1 to 40 years.
• Fixed Premiums: The premiums remain the same throughout the policy's duration, providing stability and predictability. However, you may have the option to change them if needed.
• Death Benefit: If the policyholder passes away during the term, the beneficiary will receive a death benefit. This benefit is typically tax-free and can be used by the beneficiary as they see fit.
• Competitive Rates: Term life insurance quotes are known for being competitive and dependable, making it a cost-effective option for those seeking life insurance.

Types of Term Life Insurance

There are several types of term life insurance policies to choose from, depending on your specific needs:

• Fixed Term: This is the most popular and basic type of term life insurance. It offers coverage for 10, 20, or 30 years, with static premiums throughout the term.
• Increasing Term: This type of policy allows you to increase the value of your death benefit over time, but it comes with slightly higher premiums. These policies tend to deliver a larger payout.
• Decreasing Term: Opposite to increasing term, decreasing term insurance reduces premium payments over time, resulting in a smaller death benefit. This type of policy is suitable for those who anticipate fewer financial obligations as they age.
• Annual Renewable: Annual renewable life insurance provides coverage on a yearly basis and must be renewed by the end of each term. The premiums usually increase with each renewal, making this option more expensive in the long run.
• Group Term: This type of insurance is purchased through your employer and functions as a workplace plan, providing coverage for all employees.

Benefits of Term Life Insurance

• Affordability: Term life insurance is typically more affordable than whole life insurance, making it a cost-effective option for those with specific timelines or budget constraints.
• Flexibility: You have the flexibility to choose the term length that aligns with your unique needs and circumstances.
• Financial Planning: With proper planning, a term life insurance policy can provide ample financial security for your family at a lower cost.
• Scalability: Increasing and decreasing term policies allow you to scale your death benefit up or down, giving you the ability to adjust your coverage over time.

In summary, term life insurance is a popular choice for individuals seeking temporary coverage at a lower cost. It offers flexibility in terms of duration and death benefit amounts, making it a customizable option for a variety of life stages and financial situations.

Permanent life insurance

There are two main types of permanent life insurance: whole life insurance and universal life insurance. Whole life insurance policies last for the entirety of the policyholder's life, build cash value in a secure account, and have regularly scheduled premiums. Universal life insurance policies are similar but offer the added flexibility of being able to adjust premium payments over time. This can be beneficial if you need to pay for other large expenses, but it may negatively impact the cash value of the plan and premiums could eventually increase.

The cash value of permanent life insurance policies grows on a tax-deferred basis, and this money can be used while the policyholder is still alive. It can be borrowed against, used to pay premiums, or surrendered for cash to fund retirement. Permanent life insurance policies also offer tax benefits, such as tax-efficient loans and withdrawals.

Tax implications of life insurance

Life insurance death benefits are usually not taxable as income. However, there are certain situations in which a beneficiary may have to pay tax on the interest the policy accrued.

Estate and Inheritance Taxes

If the total value of your estate is over the federal exemption limit, your beneficiaries may have to pay estate taxes. In 2024, the federal estate tax exemption limit is $13.61 million for an individual. If you die while holding a life insurance policy, the IRS will count the payout in the value of your estate, which may push the total value over the exemption limit.

Some states also levy their own estate or inheritance taxes, with exemption limits ranging from $1 million to $7 million.

Surrendering Your Policy

If you surrender a permanent life insurance policy, you may be taxed on the amount that exceeds the policy basis. This is the sum of the premiums you have paid, minus any dividends you have received.

Selling Your Policy

If you sell your life insurance policy, you will be taxed on the cash value above the policy basis as income, and on any other profits from the sale as capital gains.

Borrowing Against Your Policy

If you take out a loan against the cash value of your policy, you will not be taxed as long as the policy is in force. However, if you fail to repay the loan, the amount you owe may become greater than the cash value. If the insurer cancels the policy, you will be taxed on the amount that exceeds the policy basis.

Dividends

Life insurance dividends are not usually taxable, unless they exceed the amount you have paid in premiums over the course of the year.

Group Term Life Insurance

Group term life insurance policies are treated differently for tax purposes, depending on whether the coverage exceeds $50,000 and whether the employer is the beneficiary. If your coverage exceeds $50,000 and your employer pays all or part of the cost, the premiums will be subject to income tax.

Frequently asked questions