Life insurance & living benefits: Ways to use permanent life insurance

A solid financial plan covers many things, not the least of which is planning for retirement and having life insurance to help protect your family’s security. Often those two goals are accomplished separately with retirement savings accounts and term life insurance.

But there is a way to supplement retirement savings and provide a death benefit with one tool: permanent life insurance.

Unlike term life insurance, permanent life insurance typically has the potential to build what is called “cash value.” The cash value can be accessed during your lifetime and a portion of it is tax-free. While it’s commonly used to provide tax-advantaged funds in retirement, the cash value also can be used in other ways.

“It’s totally changed how I think about life insurance,” says Matthew Potter, a Thrivent client in Porter Ranch, California. “When I got married in 2015, my wife and I knew we needed coverage, so we purchased permanent life insurance. I had learned about how it can combine life insurance coverage and build value over time. I’m interested in ways my money can grow, so it made a lot of sense to me.”

Permanent life insurance, which typically requires more premium outlay initially than term, might not be your only life insurance coverage and isn’t intended to be your only source of retirement income. But it can play a vital role in your financial strategy for reaching your goals in life.

Permanent life insurance contracts provide a death benefit for your entire life as long as premiums are paid and the contract retains its value. Some build cash value from a portion of the premiums you pay.

“The earliest you would want to access your cash value growth is 10 years,” says Kelly Jones, a Thrivent financial advisor from Hickory, North Carolina. “But once you’ve reached that point, you can consider how well the contract is funded and whether you still need the full amount of death benefit. You potentially can access a portion of that cash value through loans or partial surrenders tax-free, if the contract is not a modified endowment contract.”

There are three main types of permanent life insurance: whole life, universal life and variable universal life. They differ mostly in the flexibility of premiums and how cash value accumulates. “The type you choose will depend on what you want to achieve and your risk tolerance,” says Ryan Schwingler, life insurance products consultant for Thrivent.

Considered the most basic of permanent insurance (and the lowest risk), whole life has a guaranteed fixed premium and guaranteed cash accumulation, says Schwingler.

“When you purchase a whole life contract, the cash value is guaranteed to equal the death benefit when you reach age 121,” he says. “You’re also eligible to receive dividends with this type of contract at Thrivent, but dividends are not guaranteed.”

Universal life insurance has an interest rate that is credited on your cash value, but that rate is reviewed annually and can change.

“If the prevailing market interest rate increases,” says Schwingler, “the amount of interest credited on your cash value may also increase.” Universal life also has a guaranteed interest rate that the contract will not go below.

Variable universal life (VUL) policies have investment subaccounts where you can invest the cash value of your policy. If the market performs well, your cash value can grow. Conversely, if the market performs poorly, your policy could lose value. The higher-risk environment of VUL will be familiar to people with other forms of investments.

“You take on more risk with variable, but you have greater potential for higher returns,” than with whole life or universal life, says Schwingler.

Higher risk was appealing to Potter and his wife, so they chose variable contracts. “I’ve been an investor since I was young,” he says, “and I’m comfortable taking more risk because we have the time to just let this [potentially] grow.”

The primary purpose of life insurance is death benefit protection, but there are other ways permanent insurance can be used. The lifetime death benefit and cash value provide a number of opportunities to help with your financial plan.

Here are seven additional ways to use permanent life insurance:

Permanent insurance can offer a way to provide income in retirement, making it an important consideration alongside your other retirement portfolio assets—401(k), pension, Social Security and so on.

Imagine you took out a permanent contract in your 30s and stayed current with premium payments until you retired at age 65. If sufficient premiums were paid, the cash value of that contract would have increased during those 35 years. If you no longer need the full amount of death benefit protection, you could then opt to receive payments from the contract’s cash value as a supplement to your other retirement income. And a portion of those payments potentially would be tax-free.

“On non-modified endowment contracts, there is no tax liability on partial surrenders until you have received all the premiums back,” says Erik Lundring, a wealth advisor in Thousand Oaks, California, and Potter’s financial professional. “Then you have a choice between tax-free loans or taxable surrenders from the earnings in the contract.”

That’s been the case with his father, Karsten Lundring, a retired Thrivent managing partner. He’s had a number of permanent life insurance contracts in place for decades. He no longer needs the full death benefit protection and is choosing to access a portion of the cash value during his life instead.

“Those contracts have been providing a partial tax-free income for me since I essentially retired,” says Karsten, who also lives in Thousand Oaks. “They also give me the flexibility I need to manage my tax liability.”

For example, if he wants to reduce his tax liability one year, he can adjust his income streams so that he takes more cash value from his permanent insurance contracts and less money from a taxable retirement fund like a 401(k).

In another scenario, you might take more cash value from insurance in a year when the market is down and you don’t want to withdraw money from your primary retirement accounts.

If you want to pass along money to your family, permanent life insurance offers the ability to do so. “The death benefit is in place for your lifetime and it’s income tax-free to your heirs,” says Erik. “But should you need funds along the way, you would still have access to the cash value.”

If there’s a charity you want to support, you can use a permanent contract that’s structured to benefit the charity. If you gift ownership of the life insurance to the charity, then any funds you gift to the charity to pay premiums may be tax deductible.

The lifetime death benefit helps families who want to be able to replace an income stream that would stop upon death, such as salary, Social Security or a pension.

Whether it’s helping a family member with college costs, paying medical bills or buying a car, cash value can help you manage a major expense.

Karsten took out loans against the accumulated cash value of his contracts when his family was young and resources were more limited. “It helped when we had some major expenses, including a down payment on our first house. And I made sure that I paid it back each time.”

Why pay it back? Because when you take out a loan against the cash value, you’ll be charged interest and the death benefit will be reduced. If you don’t pay back the loan, over time the amount of the loan could exceed the value of the contract. You could then lose the contract and potentially pay taxes on the cash value.

With a whole life contract, accumulated cash value can be accessed via a policy loan or surrender of paid-up additional insurance to offset premiums. With universal life, the contract's death benefit will remain in force, as long as there is sufficient cash surrender value, even if you're not paying a premium. In both instances, policies must be appropriately funded. Accessing cash or discontinuing premiums may reduce your cash value or death benefit, or cause them to grow more slowly.

Some permanent insurance contracts also pay dividends. Depending on the type of contract, these can be paid out in cash, used to pay premiums or used to purchase more insurance. Dividends are not guaranteed.

Permanent life insurance can help you work toward your financial goals and priorities.

“I’m so glad I purchased it,” says Karsten, who owns multiple contracts. “It’s given me the flexibility to do lots of different things throughout my life and still have life insurance protection for my wife.”

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Life insurance for estate planning

Permanent life insurance can help you accomplish goals like paying estate taxes, creating generational wealth, resolving inheritance inequities and providing for a special needs heir. Read an overview of estate planning strategies that life insurance can help with.

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Permanent insurance offers many benefits and there’s still a place for term insurance within a financial strategy. “When you need to provide a significant amount of protection for your family, like when your family is young and you need the largest death benefit for the least amount of money, term generally is the most cost-effective option over a shorter time period,” says Jones.

Then when your income increases or your needs for coverage shift—maybe you need less of a death benefit because your expenses are lower or your kids are grown—purchasing permanent insurance (or converting term into permanent) can make sense.

Thrivent has a number of tools that can help you assess your life insurance needs and how permanent life insurance may benefit your financial priorities. To learn more, talk to your Thrivent financial advisor.