Ally Permanent Life Insurance: Your Partner for the Long Haul

Ally Permanent life insurance is a type of life insurance policy that provides lifetime coverage as long as premiums are paid. Unlike term life insurance, permanent life insurance policies do not expire after a set period of time. The key defining feature of permanent life insurance is that it has a cash value component in addition to the death benefit. The cash value grows on a tax-deferred basis and can be accessed by the policyholder through withdrawals and policy loans.

There are several types of permanent life insurance:

  • Whole life insurance – Provides lifetime coverage with level premiums. The death benefit and cash value are predetermined and guaranteed. Whole life policies build cash value at a fixed rate.

  • Universal life insurance – Offers flexible premiums, adjustable death benefit, and cash value that grows at a variable interest rate. The policyholder can adjust the premium and death benefit amounts, within limits.

  • Variable life insurance – Functions similarly to universal life but with investment options for the cash value. The cash value is invested in subaccounts with varying levels of risk and potential returns. The death benefit can fluctuate based on investment performance.

The key distinction between permanent and term life insurance is permanence versus a defined coverage period. Term life provides coverage for a specific timeframe, such as 10 or 30 years. It does not have an investment or cash value component. Permanent life insurance provides lifetime protection as long as the premiums are paid. It has a cash value account that grows on a tax-deferred basis. Permanent policies tend to have higher premiums than term policies because of the cash value element.

How Permanent Life Insurance Works

Permanent life insurance provides lifetime coverage as long as premiums are paid. It combines a death benefit with a cash value component that accrues on a tax-deferred basis. Here’s how it works:

  • Premium Payments and Cash Value Buildup: The policyholder pays premiums on a regular schedule, such as annually or monthly. A portion of the premium goes toward the insurance company’s costs and profit, while the remaining amount gets credited to the policy’s cash value. The cash value earns interest at a rate set by the insurer. It grows on a tax-deferred basis, meaning you don’t pay taxes on the gains until you make a withdrawal or surrender the policy.

  • Death Benefit Payout: If the insured person passes away while the policy is active, the death benefit is paid tax-free to the named beneficiaries. The death benefit is typically the face amount of the policy, or the minimum amount guaranteed to be paid out. It remains level throughout the life of the policy.

  • Policy Illustrations: When applying for permanent life insurance, you’ll receive a customized illustration showing projected premiums, cash value growth, and death benefit based on factors like age, health, amount of coverage, and interest rates. The illustrations help give an idea of how the policy is expected to perform over time. However, they are estimates only and not guaranteed. Actual results will vary.

Benefits of Permanent Life Insurance

Permanent life insurance offers many valuable benefits that make it an attractive option for certain individuals. Here are some of the key advantages of permanent life insurance:

Lifetime Coverage

One of the main benefits of permanent life insurance is that it provides lifetime coverage. As long as you continue paying the premiums, the death benefit will payout no matter when you pass away. This ensures your loved ones will receive financial protection even if you die many decades into the future.

Unlike term life insurance, your permanent policy will not expire after a set period of time. This lifetime coverage is ideal if you want to lock in an insurability rate when you are young and healthy.

Cash Value Accumulation

Permanent life insurance builds up a cash value component that grows on a tax-deferred basis over time. This cash value acts as a living benefit, allowing you to borrow against or withdraw it during your lifetime for any purpose.

The cash value earns interest at a set rate specified in the policy and can be used to pay future premiums, boost the death benefit, or supplement retirement income. The cash value provides unique flexibility not found in other forms of life insurance.

Fixed Premiums

Permanent life insurance policies have level or fixed premium payments that are guaranteed to never increase. This allows you to lock in a consistent, predictable expense for life.

Term life premiums, on the other hand, become more expensive as you age. With permanent life insurance, you avoid the risk of future renewals becoming unaffordable due to health changes as you get older.

Living Benefits

Many permanent life policies offer accelerated death benefit riders that pay out a portion of the death benefit if you are diagnosed with a terminal or chronic illness. This can provide funds to cover medical treatments or living expenses during a health crisis.

Some policies also allow you to access a portion of the death benefit for needs like nursing home care, if you become disabled, or for other specified purposes. These living benefits give you options to tap funds during your lifetime.

Drawbacks of Permanent Life Insurance

Permanent life insurance has some potential drawbacks to consider:

  • Higher Premiums Than Term Life Insurance – Permanent life insurance premiums are significantly higher than term life insurance since part of the premium goes toward building up the policy’s cash value. Term life only covers the death benefit, so it’s much more affordable. Permanent life insurance may not fit everyone’s budget.

  • Less Death Benefit for the Premium – Due to the cash value element, permanent life insurance policies provide less death benefit per premium dollar compared to term. For example, a $250,000 permanent life policy may cost the same in annual premiums as a $500,000 term policy.

  • Limitations on Accessing Cash Value – The cash value belongs to the insurance company until accessed. Loans can be taken against the cash value, but loans accrue interest. Withdrawals can also be taken, but withdrawals decrease the death benefit if not repaid. These options may be complicated or restrictive for some policyholders.

So while permanent life insurance offers lifelong coverage and cash value accumulation, those benefits come at the cost of higher premiums and less death benefit compared to term insurance. The access to cash value also involves some limitations. These drawbacks should be carefully weighed when considering permanent life insurance.

Who Needs Permanent Life Insurance?

Permanent life insurance is most suitable for certain demographic groups who can benefit from the unique features it offers. Here are some examples of who may need permanent life insurance:

Young Families

Young families who want to lock in insurability can benefit from permanent life insurance. Term life insurance becomes more expensive as you age, so permanent life allows you to lock in a level premium for life. This ensures you’ll have affordable coverage when your family depends on your income the most. Permanent life insurance can also build cash value that you can tap into for college savings or other needs.

High Net Worth Individuals

Wealthy individuals often use permanent life insurance for estate planning purposes. The tax-free death benefit can help offset estate taxes so more assets pass to beneficiaries. Permanent policies with cash value also allow tax-advantaged access to funds while living. This allows high net worth policyholders to supplement retirement income or fund other goals.

Small Business Owners

Permanent life insurance appeals to small business owners seeking business continuity funding or executive benefits. The tax-free death benefit can fund a buy-sell agreement to ensure a smooth transfer of ownership if an owner dies. Permanent policies with cash value also allow tax-deferred growth that can fund retirement or executive compensation goals. Business owners can access cash value through loans and withdrawals.

How Much Permanent Life Insurance Do You Need?

When determining how much permanent life insurance coverage you need, there are a few key factors to consider:

Income Replacement Needs

If you have dependents who rely on your income, you’ll want to have enough life insurance to replace your income for a certain number of years. Experts often recommend getting 10-12 times your annual income in coverage. So if you make $100,000 per year, aim for $1 million to $1.2 million in permanent life insurance. This will provide adequate income replacement for your dependents to maintain their standard of living.

Final Expenses

At a minimum, your life insurance benefit should cover your final expenses, like funeral and burial costs. Typically this is around $10,000 to $15,000.

Estate Taxes

If you have a high net worth, permanent life insurance can be used to pay any estate taxes so your heirs don’t have to liquidate assets to cover the taxes. The estate tax exemption is over $11 million per individual in 2019, but this amount may be lower in the future.

Business Continuation

If you own a business, permanent life insurance can provide liquidity to keep the business running if you pass away unexpectedly. It can also be used to fund a buy-sell agreement so your business partner can purchase your ownership share. This ensures your family gets paid for your business interest while allowing the business to continue operating.

The amount needed depends on the value of the business, projected future earnings, and the specifics of any buy-sell agreements with business partners.

Permanent Life Insurance Riders

Permanent life insurance policies often include optional riders that provide additional benefits for an extra cost. Some popular riders to consider include:

Accelerated Death Benefit Riders

An accelerated death benefit rider allows you to access part of the death benefit while still living if you’re diagnosed with a terminal illness. This provides funds to help cover medical bills or other expenses.

With this rider, you can withdraw a portion of the death benefit, usually 25-100% depending on the policy. This payout reduces the total death benefit your beneficiaries will receive.

Waiver of Premium Riders

This rider waives the premium payments if you become unable to work due to disability. It ensures your permanent life insurance policy stays in force if you can’t afford the premiums.

The definition of disability varies by policy. Some will require you to be unable to work at any job, while others define it as unable to work at your own occupation.

Long-Term Care Riders

A long-term care rider allows you to access part of the death benefit to cover long-term care costs. This can help pay for in-home care, assisted living, or nursing home care as you age.

The benefit is usually a percentage of the death benefit, such as 1-5% paid monthly. Using the rider reduces the total death benefit for beneficiaries.

Riders add flexibility and options to permanent life insurance. Consider which benefits are most valuable for your situation when selecting riders. They provide added protection and access to funds if needed.

Permanent Life Insurance Tax Treatment

Permanent life insurance offers some valuable tax advantages that make it appealing for many policyholders. Here are some of the key tax benefits:

  • Tax-deferred growth on cash value – The cash value within a permanent life insurance policy grows on a tax-deferred basis. This means you don’t pay taxes on the gains each year, allowing your money to compound more quickly. Taxes are only owed once you make a withdrawal or surrender the policy.

  • Income tax-free death benefits – The death benefit payout from a permanent life insurance policy is generally income tax-free. This means your beneficiaries get the full sum, without any taxes deducted. For permanent policies owned outside of an IRA or qualified retirement plan, the death benefit passes to beneficiaries free of both income and estate taxes.

  • Policy loans not taxed as income – You can access your cash value through policy loans, without triggering income taxes. This gives you access to your money while avoiding taxes. Interest will accrue on loans, and unpaid loans decrease your death benefit, but loans are a useful option. As long as you pay back the loan, there are no tax implications.

The tax deferral on cash value growth, tax-free death benefits, and the availability of tax-free policy loans make permanent life insurance an efficient vehicle for building wealth. Carefully weigh the benefits when considering permanent life insurance.

Alternatives to Permanent Life Insurance

Permanent life insurance provides lifetime coverage and can build cash value, but it also comes with higher premiums. For some people, there may be better alternatives for their insurance needs. Here are a few options to consider instead of permanent life insurance:

Term Life Insurance

Term life insurance provides pure death benefit protection for a set period of time, such as 10, 20, or 30 years. Premiums are significantly lower compared to permanent life insurance since term policies do not contain any cash value component. Term insurance makes sense if you need coverage for a specific need that will disappear over time, like providing for children until they become adults. The downside is that term life insurance coverage expires after the end of the term unless additional renewals are purchased.

Investing the Difference

Some financial experts recommend getting a lower amount of permanent life insurance and investing the premium difference you would have paid into mutual funds or other investment vehicles. This allows you to get some permanent coverage plus potentially earn higher returns by investing. It also provides more flexibility since you can adjust your investments over time. However, this path does require more active management and risk on your part.

Self-Insuring

If you have significant assets and net worth, you may be able to effectively self-insure by relying on your existing resources instead of paying life insurance premiums. For example, if you have over $1 million in liquid assets, you may be able to cover your family’s needs with your current wealth. The downside is that self-insuring exposes you to more risk if markets decline or unexpected expenses come up.

Evaluating alternatives allows you to find the most optimal life insurance approach based on your specific financial situation and needs. Consulting an insurance advisor can help identify the right solution.

Finding the Right Permanent Life Insurance

Choosing the right type of permanent life insurance is crucial for getting adequate coverage at a reasonable cost. The main types to consider are whole life, universal life, and variable life. Whole life has fixed premiums and death benefits, while universal and variable life allow more flexibility. Universal life may offer lower premiums initially, but premiums can increase over time. Variable life ties cash value to market performance for potentially higher returns.

Finding a reputable life insurance provider is also key. Look for companies with strong financial ratings from agencies like A.M. Best. An A or A+ rating indicates excellent financial strength. Also verify the company is licensed in your state.

Getting quotes from multiple insurers helps find the best rate. Be sure to get quotes for the same coverage amounts and policy types for an apples-to-apples comparison. Online quote tools make it easy to get quotes from many companies at once.

Several factors affect permanent life insurance costs, including:

  • Age – Premiums are lower when you’re younger.
  • Health – Good health leads to lower premiums. Pre-existing conditions or risky hobbies may increase costs.
  • Coverage amount – More coverage means higher premiums.
  • Riders – Adding riders like disability waiver of premium increases costs.
  • Length of premium payments – Paying over a lifetime is more expensive than paying for a set period.

Shopping around and considering these factors can help you find affordable permanent life insurance tailored to your needs.

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