How Permanent Insurance Fits Into Your Game Plan to Build and Protect Wealth

Permanent Insurance: Using the Two-Way Player Game Plan

The pandemic caused me to watch more football this past season than any other. The game has changed much over the years. One remnant of a bygone era is the “two-way player,” who played both offense and defense. With a few rare exceptions, the two-way player is extinct in football, but the concept lives on in finance as well as estate and asset protection planning.

What is Permanent Insurance?

Permanent insurance (whole life and universal) is a financial product and planning tool that serves both offensive and defensive purposes. In this context, “offense” refers to building wealth and “defense” is about protecting your assets and family. The versatility and benefits of this tool is worth understanding for everyone concerned with building and preserving wealth.

Playing Offense: Building Wealth

The policy’s cash value makes permanent insurance an investment. The cash grows over time as you pay the premiums. Contrary to the lower-cost term life insurance, there is a return on investment. Some policies pay dividends that may be reinvested to grow the cash value more quickly.

Permanent life insurance premiums are higher, but the insurance companies make more money on term policies. The reason is that most term policies expire before the insured dies and the death benefit is never paid. With death being the only sure thing in life, permanent life insurance will always pay a death benefit, so long as the premiums are paid.

Another advantage comes from leaving a tax-free legacy to heirs as death beneficiaries. Other legacies, including qualified retirement plans such as a 401k or traditional IRA, are taxed when the beneficiaries are paid.

Higher premiums than term life insurance is one of the drawbacks to permanent insurance. For that reason, permanent insurance adherents often reduce their qualified plan contributions for budgeting and cash flow purposes to help pay the premiums. You can crunch the numbers for a cost/benefit analysis to determine the right trade-off between deferred taxes paid on a qualified plan versus untaxed insurance death benefits.

The versatility of permanent insurance can help achieve objectives including providing supplement retirement income by drawing on the cash value and helping to pay for your children’s college. The policy can be structured and adjusted to address its owner’s needs in a variety of ways and paying premiums resembles savings account deposits. The flexibility includes the ability to use a sliding scale to reduce the monthly premiums in exchange for a lower death benefit, should cash flow become an issue.

The policy holder may also borrow against the cash value. One popular way to do this is through a bank line of credit secured by the cash value, similar to a home equity line of credit.

A more advanced (and risky) investing strategy involves arbitrage. This is done by borrowing from the policy at a low-interest rate, then investing that cash into a vehicle paying a higher return and earning a “spread.” Private, “hard money” mortgage lending to real estate investors is a common and lucrative way to arbitrage. The risks of such strategies, however, must be understood. All investors considering such moves need sound legal, financial and tax advice from professionals before entering this arena.

Playing Defense: Protecting Your Family

In football, it’s long been said that defense wins championships, though the offensive players receive the most acclaim. Similarly, making money is more glorified in finance and investing, but protecting wealth is just as important. Permanent life insurance plays strong defense to protect your family from the economic impact of the policy holder’s death or disability.

The primary defensive return on investment is the death benefit to your successors. Unlike term insurance, the death benefit doesn’t expire, and it grows over time alongside the cash value.

Actuaries will tell you the probability of becoming disabled before retirement age is far greater than death. For that reason, disability insurance is worth considering. Many permanent life insurance policies may include a disability rider to address that potential crisis.

In Florida, the cash value and death benefits are exempt from creditor claims. I’ve written extensively on asset protection and counsel clients on the topic. Few of us are immune to a financial or health crisis jeopardizing what we’ve worked hard to build under attack from creditors and predators.

A fundamental principle of asset protection planning is to hold as much of your wealth as possible in asset classes that are exempt from creditor claims. One important exception to this shield is that cash value is not protected when the insured is someone other than the debtor, such as when a debtor husband buys a policy insuring his wife’s life.

When the Game Plan Does Not Fit

No planning tool is right for everyone, and permanent insurance has drawbacks. As discussed above, the premiums are more expensive than term life. A family may not be able to justify the cost while more affordable term life can deliver the same economic protection at death.

Permanent insurance is more complex and harder to understand. Fully comprehending the benefits to make an effective cost-benefit analysis may require much effort. The investment returns aren’t as strong as some alternatives to place your money. For many, a mix of term and permanent life insurance products is the best fit.

Due to the defensive benefits, I urge many clients to consult with a financial advisor and insurance agent to discuss their insurance needs. If you have questions about protecting your family and wealth through asset protection strategies, including permanent insurance, please contact me.