Retirement & Financial Planning Report

Many permanent life insurance policies have not lived up to their illustrations. Image: ITTIGallery/

When shopping for life insurance, many people choose permanent insurance policies even though they are more expensive than term policies. Term life policies pay a specified amount if the insured individual’s death occurs within a certain time period, and their premiums may be relatively low. However, they do not accumulate cash value.

In permanent life policies, which may be whole life, universal life, or variable life, premiums generally are much higher than they are with term life. Some of the excess you pay goes into an account to build cash value.

The cash value can grow, tax-free. As you get older, and the cost of term life insurance increases, money from the cash value can keep the policy in force. As the name suggests, a permanent life policy may be your best choice if you want a life insurance policy that will pay off, no matter when you die.

However, if you bought a permanent life insurance policy years ago, be careful. In these policies, consumers put money into a cash value account, which is assumed to grow over time. When the insured individual gets older and coverage becomes more expensive, the cash value can be tapped to pay the higher cost.

Many of these policies were sold with illustrations that have proven to be much too optimistic, in regard to the growth of the cash value.

* Variable life policies may have assumed strong market performance from the underlying investment accounts far stronger than what has turned out to be the case.

* Universal life and whole life policies typically base their projections on current interest rates. These policies might have been illustrated with the projections of interest rates around 7 percent or 8 percent but insurance companies have earned far less in recent years.

The result? Many permanent life insurance policies have not lived up to their illustrations. Unless you pay higher premiums than originally projected, your policy might lapse. In that case, you’ll lose the insurance coverage you’re expecting and you might owe income tax. Therefore, you should call your insurance agent for a policy review.

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