Life insurance 102: Five success factors when using permanent life insurance
Money Matters
By David B. Snyder, JD, CLU, September 2, 2019
In the initial installment of this two-part article, I provided an overview of the different types of life insurance products and their respective pros and cons. In the second part, I focus on permanent life insurance and discuss success factors to consider when evaluating and implementing these products.
Why dermatologists might use permanent life insurance
There are many reasons why a dermatologist might consider using permanent life insurance, as opposed to term insurance. These include:
1. Asset protection
Asset protection planning is an important aspect of wealth management for many dermatologists. In many states, permanent life insurance is an exempt asset, enjoying the highest level of protection for both cash values and death benefits.
2. Wealth accumulation
Because of the varied investment options within permanent life, the tax-free growth of cash values, and the ability to access such values in retirement (or whenever you want) tax-free, permanent insurance can be a powerful part of a physician’s wealth accumulation and retirement plan.
3. Estate planning
Permanent life insurance plays a critical role in estate planning because it is permanent (if premiums are paid), and because of the liquidity it provides upon the death of the insured(s). Term insurance cannot play a role in estate planning since it is not guaranteed to last until the death of the insured.
Five success factors in utilizing permanent life insurance
From our firm’s experience in working with over 1,000 physicians, we have identified five fundamental success factors that should be part of any allocation to permanent life insurance. The absence of any of the five factors could undermine policy performance and negatively impact the use of permanent life insurance in your overall wealth planning.
1. Long-term time horizon
Whether a permanent life policy is designed to accumulate significant cash value for the policy owner’s retirement, a physician’s buyout, or any other purpose, it is important that the purchaser have a relatively long (15+ years) time horizon. Of course, if the policy is designed for estate planning, this time horizon may be 30 years or more, depending on the age of the insured.
The need for a longer time horizon makes permanent life insurance similar to a qualified retirement plan (QRP), such as a 401(k). Like the tax penalties incurred when QRP funds are accessed prior to age 591/2, many permanent life insurance policies have “surrender charges” that are imposed if an owner surrenders the policy in full (but not if they access some of the cash values). The amount of this surrender charge covers the insurance company for many of its upfront expenses and thus decreases over time. For many policies, the surrender charge reaches $0 between 8 and 15 years. Thus, if a physician keeps the policy in force beyond the “surrender period,” he or she has effectively amortized the upfront costs over time and will not be penalized if the policy is surrendered.
Beyond avoidance of potential surrender charges, taxes are another important reason to keep permanent life insurance in place for longer time periods. This is especially true for physicians using such policies for future retirement income, because the tax benefits afforded by a policy (tax-free growth within the policy and tax-free access through basis withdrawals and policy loans) only gain more value as the cash value compounds over time. As with Roth IRAs, the simple math dictates that the longer one can enjoy tax-free growth and access, the better.
2. Proper policy design
While it is important for a policy owner to have a long-term horizon for permanent life insurance, it is equally important that the insurance agent design the policy from the outset to meet the physician’s unique plans. This design should consider affordable premium payments, reasonable growth expectations, and numerous other factors.
3. Policy flexibility
Flexibility is perhaps the most important factor in designing a permanent life policy, and one that should be highlighted separately. Flexibility can be incorporated into the policy in several ways, from product type and funding plan, to investment options and beneficiary designation.
4. Regular reviews and maintenance
Permanent life insurance, like any other asset class in which one might invest, requires regular performance reviews. Just as you review your investment performance quarterly or annually with your investment advisor, you should also review your life policy with your insurance agent. In those reviews, you can make decisions on myriad options within the policy, taking advantage of the flexibility mentioned above.
Whether changing investments within the policy, paying more or less premium, changing premium frequency, adjusting the death benefit, adding or removing a beneficiary, or even exchanging the policy for a different type, regular reviews are where the agent and the policy owner bring issues to light and make decisions accordingly. Permanent life insurance is not a “set it and forget it” asset — few valuable assets are.
5. An experienced and ethical insurance agent
A dermatologist considering the purchase of permanent life insurance should select an insurance agent who can navigate the broad selection of products in the market, understand the features of a specific policy, and approach the business ethically. This type of agent will make sure that the other four success factors are in place.
What should one look for in a life insurance agent? It is essential to work with a truly independent agent — one with no restrictions on the policies they can offer and no payment incentives to prioritize one company’s products over another. Beyond that, the agent should have true expertise in the field, including significant experience with permanent life policies, to be able to understand possible pitfalls and build in flexibility to avoid them. Finally, it is always a good idea to work with professionals who are well-regarded in the industry and have numerous references to provide.
Conclusion
If properly designed and maintained, permanent life insurance can be a powerful part of a dermatologist’s overall wealth management plan. This article listed three reasons why a dermatologist might choose permanent life insurance over term insurance and detailed five success factors to consider when evaluating and implementing this financial tool.
Disclosure:
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.
