What is permanent life insurance?
To begin to understand permanent life insurance, it is helpful to understand that there exist two different types of life insurance, namely term life insurance and permanent life insurance, with two different kinds of benefits, namely death benefits and living benefits.
Let's start by understanding the most common type of life insurance, which is term life insurance, that only features death benefits.
This article is written as general education, and should not be considered as personal financial advice. If you would like personal guidance with life insurance, you can schedule a time to talk with one of our experts.
The death benefit of all life insurance
Term life insurance is a policy that is bought to protect loved ones in case the breadwinner of the family dies prematurely. If he or she does, this policy will pay what’s called a death benefit to replace the income of the deceased.
Term life insurance is only valid for a limited amount of time - usually between 10-30 years, after which point it stops providing protection. Unless the insured person has died during this time, all the money spent on the policy is lost, and the person has the ability to either sign up for a new policy at a higher price or live without protection.
The living benefits of permanent life insurance
While permanent life insurance does include the death benefit of the term life insurance, it also features living benefits in the form of an investment account called a cash value.
This cash value can provide benefits while the owner is alive, such as yearly dividends or policy loans.
While these policies require higher premiums than term life insurance, they are less expensive for most people over the long term since they will pay out the death benefits no matter when the insured dies and provides its owner with the benefits of a cash value during his or her lifetime.
A permanent life insurance policy can be funded in different ways, giving more focus to the cash value or the death benefit, depending on the preference of the owner.
Because of the cash value, permanent life insurance is valid for the entirety of the owners life.
The cash value will grow with limited potential for loss, such as through a minimum guaranteed return or a no-loss guarantee while following the returns of the stock market.
Additionally, the growth of the cash value is tax-free.
Unlike the tax advantages of a normal retirement account like an IRA, a qualified annuity or a 401k, where investment growth is only tax free until the retirement of the owner, the growth of the cash value remains tax free for the entirety of the owners life.
Permanent life insurance as a family bank
Permanent life insurance should be viewed as a financial instrument that can create stable and dependable returns, and has been used as such to build portfolios of policies by wealthy families like the Rockefellers. Ever since the 1800s, families like these have been buying permanent life insurance to all their newborns, and have been using it as their own family bank.
To use permanent life insurance as a private bank, families can use the secure returns and flexible loan qualities of the policy to grow their family wealth over the long term. This helps to protect family fortunes from being spent and lost by future generations, as the money will be made available to them through loans, where every dollar has to be repaid with interest.
By making money available to your kids through loans rather than gifts, you teach them how to use money wisely, and make sure that every received dollar is returned tenfold.
With this ability, the children will be equipped to create their own success, rather than live off a depleting source of their parents successes.
This is an invaluable lesson that many children miss out on by being given money without any counter-requirements, often resulting in a lacking understanding of the value of money and how to use it.
With this financial discipline and skill, not only is the family fortune protected, but it is also much more likely to continue to grow over several generations, as new descendants learn how to make their own fortunes, albeit with leverage.
In general, the reasons families choose to use permanent life insurance are one or several of the following:
- To ensure family wealth in the face of mortality
- To achieve dependable returns through the ups and downs of the markets
- To save on taxes over the long term, not just until retirement
- To protect themselves from unexpected financial loss
- To use it as a family bank and fund family investments and projects
Permanent life insurance as a company asset
Institutions are also heavy users of permanent life insurance. In fact, more than three fourths of big banks in the US use permanent life insurance as an asset on their balance sheets, as it regularly outperforms the Certificate of Deposits that they sell to their customers.
In fact, there are even laws in place that dictate that banks has to hold a certain amount of secure assets like permanent life insurance in comparison to their risky assets like stocks or real estate. These laws help make sure that banks does not go bankrupt during market crashes, like many other individuals or organizations might.
Many companies also owns permanent life insurance as an asset. Not only does it enable them to provide and fund their employees benefits program, as well as protect their key managers, but it also provides all of the investment advantages that makes it popular amongst banks.
For companies, permanent life insurance is an effective way of keeping investments on the balance sheet without taking on too much risk, which might cause harm to the main business operations.
The reason that permanent life insurance is a popular choice amongst institutions and organizations are one or several of the following:
- To hold and grow cash reserves
- To avoid taxes on gains and windfalls
- To protect themselves from unexpected loss
- To keep pace with rising costs
- To fund employee benefits programs
- To prepare for an unpredictable future
Overall, permanent life insurance is a great alternative asset class that has been used by the wealthy and banks for centuries. While it is often misunderstood, and sold in the wrong way, there is a reason that individuals and institutions with money chose this asset class. These reasons are related to dependable and tax free returns, as well as improved liquidity through policy loans.