• Harry N. Stout

The Consumer Benefits of Life Insurance


Life insurance has many benefits and guarantees that are intrinsic to the product, but are not fully understood by consumers. In this post, I will highlight the top consumer benefits of life insurance coverage. For a complete review of what the product can offer you and your family, please read my new book, Today’s Life Insurance – A Protection Tool for Your Future.


Here are the top consumer benefits of life insurance:


Tax-Advantages. Life insurance has been designed, and Congress has bestowed upon it, the ability to provide tax-free death benefits to beneficiaries, tax-deferred accumulation, and tax-free access to cash value using loans or withdrawals.


Cash Value. Some life insurance policies have more of an investment aspect to them than others. Permanent policies are designed to build cash value, like whole life and universal life, and let the policyholder have access to a return on the excess cash in the policy without needing to wait for death. These forms of permanent life insurance give the owner access to cash by being surrendered, loaned against or having cash withdrawn before the insured person passes away.


These policies can all have a positive net return while the insured person is still alive, and thereby are an asset that can pay at any time during the insured person’s life. The key for the consumer is that the cash value taken from the policy is not restricted and can be used for any purpose, including funding college costs, funding wedding costs, supplementing retirement income, starting a business or fulfilling another personal need.


Death Benefits. Life insurance policies that are bought just for the death benefit also have a serious economic value. For instance, a term insurance policy will pay out a death benefit as long as the policyholder makes all the scheduled premium payments during the policy’s defined term. For death benefit policies, the valuation really depends on the type of term life insurance policy you have. If the term policy is convertible, it can be considered personal property and therefore could possibly be considered an asset.


Living Benefits. Over recent years, life insurers wanted to devise ways to enhance the consumer value of life insurance beyond providing death benefits and tax advantages discussed above. They started this enhancement process by allowing terminally ill policyholders to be able to access cash from their policies to help pay for the costs of their illness and care while they were still alive. They then added provisions that allowed insureds to withdraw cash to pay for nursing home costs. In addition, a variety of benefits became available including chronic illness, disability, critical injury, long-term care, and supplemental retirement income. The insurers have carefully defined the events or conditions that trigger these new benefits.


Access to Cash When Needed. Most potential buyers don’t understand that permanent life insurance policies have contractual features that allow the owner of the policy to withdrawal cash from the policy using tax-advantaged loans and withdrawals. There are no regulatory restrictions on how the cash taken from a life insurance policy can be used by the owner. This creates significant flexibility to use the cash to fund a variety of needs, be they health, long-term care or personal needs such as putting on a new roof. Today life insurers have set up their administrative systems to process loan and withdrawal payments very quickly, usually in a matter of days.


Life Insurance as an Asset Class. Many financial planners now consider life insurance policies as an asset class when they prepare financial plans for their clients. As we have discussed in

The FinancialVerse – A Common Sense Approach for Your Money, an asset is something you pay for today and hope for some cash flow from in the future. Insurance is like this. The future cash flow is contingent on some event such as death—it is clearly an asset.

Summary

Life insurance has a number of key benefits: Protection, tax-advantages, financial, emotional, and psychological. Permanent life insurance policies can provide cash liquidity, which in turn can provide access to accumulated cash in the policy that can be used for any purpose. Understanding the contractual provisions of the policy you are purchasing will allow you to assess these values when or if they are needed.

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The third book in the series, Today’s Annuity Products – A Tool To Create Protected Lifetime Income will be released in November.

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