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Though many people buy life insurance to provide their family members with financial relief after their death, you can also use a permanent life insurance policy as a wealth management tool.
Though permanent life insurance can be expensive, you can also use it to compound your net worth through overfunding. Our guide will help you learn more and get started with a policy suited to your financial situation.
What is Permanent Life Insurance?
Permanent life insurance is a type of policy that never expires. These policies have both a death benefit and a cash value that grows over time. Permanent life insurance is 1 of the pricier policy options. Thankfully, if you’re a wealthy individual, you can afford this type of policy.
The 2 main types of permanent life insurance policies are whole life insurance and universal life. Whole life insurance offers lifetime coverage with savings that grows at a determined rate. There is a guaranteed rate of return because a certain amount of your premium goes into the cash value each month.
Universal insurance offers a death benefit in addition to savings but the premiums and earnings work a little differently. The interest rate on the cash value of universal insurance is subject to change in accordance with the market interest rates. Your premium decreases and increases to offset the interest rates. However, with universal insurance, you can change the premium and death benefit amounts without having to take out a whole new policy.
Both types of permanent life insurance policies also include a death benefit, which is paid out in cash to your beneficiaries after you die. Unlike term life insurance policies, your beneficiaries are guaranteed to receive a death benefit no matter when you die so long as you continue to pay your premiums.
What is Overfunding?
Overfunding occurs when you pay more into an insurance policy than is required. Permanent life insurance policies have both a death benefit and a cash value. The cash value of your policy is an investment link savings account included within the terms of the policy. A certain amount of your premium contributes to your cash value monthly. The cash value accrues interest over time at a certain rate. This cash value can be withdrawn once it reaches a certain value.
If you are overfunding your policy, you are adding to the cash value. Different policies have different rules and therefore could have different maximum amounts that can be paid into the cash value of your policy. This is a safe investment option because you are already contributing to your life insurance and it would only add to the amount that you can withdraw eventually or that will be left to your family.
Overfunding your policy can be especially beneficial if you plan on accessing the cash value portion of your policy later in life. Overfunding will increase the amount of cash value, and you can access the cash value through withdrawals or loans. An overfunded policy also offers benefits, including tax-deferral, loss limitation and asset protection.
Although you don’t usually pay income taxes on the interest you earn through a life insurance policy, you can run into tax implications when withdrawing from the cash value. The IRS has no set yearly limit when it comes to the amount you can contribute to your life insurance policy.
However, the policy may become taxable if it exceeds a limit on how much you can pay into it. Different policies will have inherent limits, so be sure to determine those before considering overfunding in order to avoid the policy being labeled a modified endowment contract (MEC).
Is it Complicated?
While there are benefits to overfunding your life insurance policy, limitations and contribution rules can be confusing. You should speak with a financial adviser, as well as a tax professional, to make sure you follow all of your area and policy’s funding rules and regulations. Overfunding is most commonly used by wealthy individuals because they can afford to sit down with these professionals as many times as is needed to avoid complications.
Can Average Americans Do This?
Yes! Though a permanent life insurance policy is expensive on its own and overfunding would just mean spending even more on the policy, you don’t need to achieve a set net worth before you can begin overfunding your policy. Anyone can allocate some savings to it or use a year-end bonus to buy the policy.
However, speaking with a financial adviser is recommended, as these types of investments can quickly get complicated. Be sure you’ve allocated funds to buy the policy, and speak with a financial adviser before you enroll.
Compare Life Insurance
Searching for the right life insurance policy can be a hassle — but it doesn’t need to be. One of the most difficult parts of choosing a permanent life insurance policy is deciding which company you want to work with.
After all, you’ll likely be making payments on your permanent life insurance policy for years to come — which makes it even more important to choose the best insurance provider for your needs.
Some of the qualities you might want to consider when you choose an insurance provider include:
- Customer service reviews: If you’ve never bought life insurance before, knowing that a great customer service team has your back can be comforting. Check up on each company’s customer service quality by reading a few reviews before you select a company.
- Credit rating: You can research insurance companies’ credit ratings using AM Best. Be sure to choose a company with strong financials.
- Rates: Permanent life insurance can be expensive — especially if you’re older. Comparison shopping between a few insurance providers can help you find the most affordable insurance for your needs.
Not sure where to begin your search? Consider starting with a few of our favorite insurance providers using the table below.
- securely through Ladder Life Insurance's websiteBest For:Adjustable coverage
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers – for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products. Coverage amounts vary by state.
- Best For:Under Age 64
Haven Term is a Term Life Insurance Policy (ICC21 Haven Term in certain states, including NC) issued by C.M. Life Insurance Company (C.M. Life), Enfield, CT 06082. In New York (DTC-NY) and California (DTC-CA), it is issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.
Should You Buy Life Insurance?
Many wealthy individuals believe that they don’t need to purchase a life insurance policy because they will have plenty of assets to cover their end-of-life costs and to pass onto their families.
However, there are a range of benefits that come with permanent life insurance for both you and your family. Though overfunding your policy can be confusing, wealthy individuals can afford to work with the necessary team of finance professionals to thoroughly understand their options.
If you’re thinking about buying a life insurance policy, be sure to begin comparing your policy options now. Life insurance doesn’t need to be complicated when you leave yourself with plenty of time to think about where you want to enroll.
Frequently Asked Questions
Do millionaires need life insurance?
Yes. Though a million dollars might seem like a lot of money, it can quickly become depleted if you run into unexpected medical bills or end-of-life expenses. Buying a life insurance policy can help your family cover these types of expenses after you die.
Is life insurance a waste of money?
No. Life insurance policies can help your family pay for any expenses incurred after you die. Unless you consider taking financial burdens off of your family to be a waste of money, life insurance is a useful tool for your loved ones and is worth the expense.
Benzinga crafted a specific methodology to rank life insurance. To see a comprehensive breakdown of our methodology, please visit our Life Insurance Methodology page.
About Sarah Horvath
Sarah is an expert in the insurance, investing for retirement and cryptocurrency space.