The Benefits Of Permanent Life For Middle-Income Earners

Last year, predictions abounded that COVID-19 would spark a rise in life insurance sales — and it did. A LIMRA study released in May 2021 confirmed those predictions, with new policies increasing 11% year over year. With so many Americans joining or returning to the life insurance fold, advisors should work to ensure clients are well versed on all their options, including permanent life.

For many Americans — particularly those in the middle class — the main point of life insurance is the death benefit: how much security they want their families to have once the client is gone. However, they may not be aware of the living benefits that permanent life offers them while they’re still alive. Explaining these benefits while interest in life insurance remains high can help set clients up for greater retirement and overall financial security.

Working Toward Permanent Life

While high-income earners are typically seen as best suited for a permanent life policy, most clients making at least $70,000 per year can at least consider it. As long as clients are saving at least $300 a month on top of 401(k) contributions and emergency fund upkeep, permanent life is probably an option worth exploring.

Before discussing permanent life with your client, make sure they’re covering the financial basics first: emergency funds, fun money and 401(k) contributions up to an employer-matching level. It’s possible to afford permanent life insurance with moderate levels of debt, but the extreme, six-figure levels of student debt that come with medical or law school are too high. Any debt that has an interest rate of 5% or higher should be reduced before a permanent life policy is purchased.

Some clients may think they’re too old for permanent life, but here is no hard age cutoff for the policy. Older clients will need to contribute more to a policy now to make full use of it in retirement, but that is a perfectly feasible plan if they have the necessary extra income.

Securing Retirement

You may need to explain the basics of permanent life and how it can create retirement income for middle-income clients. Walk them through how most permanent life policies place part of the monthly premium — and, in some cases, extra contributions — in a cash value investment account. This fund grows tax-deferred like a typical 401(k) or individual retirement account.

Although the disadvantage is that these cash funds usually grow at a lower rate than the market, the upside is that clients can take advantage of their policy’s cash value without ever paying any taxes.

If they have a large enough cash value in their permanent life policy, clients can generate retirement income by taking out loans against that cash value. While this does require clients to put a substantial amount of money into the policy over time, these loans are tax-free and low-interest and don’t have to be paid back. The amount of any loans left unpaid is simply subtracted from the remaining death benefit. For middle-income clients who can handle the high premiums, this can be a stable and attractive source of tax-free retirement income.

Some middle-income clients may hesitate at the idea of taking out so many loans, even after they learn they don’t have to pay them back. This is an opportunity for advisors to explain another advantage of these loans; since the loans aren’t withdrawals from investment accounts, permanent life cash value accounts will retain more value and generate more income than an IRA, 401(k) or bond fund with an equal value at the start of retirement. To put it simply, permanent life cash value lasts longer than traditional retirement accounts.

Nonretirement Benefits

Loans taken out against a permanent life policy’s cash value can be used for more than just retirement income, and this factor can be attractive to middle-income clients. They can be used for big-ticket items such as weddings or their children’s college. The low interest rates mean they can also be used to pay off higher-interest debt, such as student or auto loans. Plus, neither the cash value of a permanent life policy nor any loans against it count toward the expected family contribution for a child’s college expenses under the Free Application for Federal Student Aid.

Permanent life often comes with riders that allow the use of a death benefit to pay for long-term care needs or a suspension of premiums for long-term disabilities. These riders offer a crucial part of retirement security, especially considering the high numbers of Americans who will either become disabled or need long-term care.

Not everyone will need permanent life, nor is everyone qualified for it. But for middle-income clients seeking both a death benefit and retirement security after COVID-19, advisors can guide them through permanent life options and find the best-fitting, individualized solution.

Kerry Wallingford, RICP, CLU, ChFC, of Normandy Park, Wash., is a 21-year MDRT member with 11 Top of the Table qualifications, specializing in retirement, business and college planning. Kerry may be contacted at [email protected].