Permanent life insurance is much more expensive than term insurance which is pure insurance. A 35 year old who wants $200.000 worth of term coverage might pay $300 a year. Each year, the term premium will grow, to $400, $500 and so on. Thus term insurance can become incredibly expensive in your 60s.70s & 80s. In contrast a 35 year old might pay $2,000 per year for a $200,000 permanent life insurance policy. However that premium is meant to be permanent, staying level through the years. The idea behind permanent life insurance is that the excess premiums go into an investment account called the cash value. As you get older, and your cost of pure insurance exceeds $2,000 per year, the cash value will be tapped to make up the difference. In the real world, it is unlikely that you will pay premiums for 30 years. Most permanent policies are sold with the idea that the premiums will vanish after a certain period. Instead of paying $2,000 per year, you might pay $3,000 so your cash value will build faster. After, say 10 years the cash value may be large enough so that no further payments will be necessary.
When your excess premiums to into an insurance policy's cash value, the investment earnings grow tax free. With whole life or a universal life policy you get bond like growth, much as you get with a fixed annuity. With variable life insurance you direct your premium dollars among several investments, including stock funds. Thus, variable life insurance is similar to a variable annuity.
What ever type of permanent insurance you buy, your cash value will build up over the years, with no reduction for current income tax. Say you pay $3,000 per year, from ages 35 to 45. By the time you reach 65 your $30,000 in premiums may have generated a cash value of $150,000. When you retire, you can access your cash value by using policy loans and withdrawals. Let's suppose you take out $10,000 per year, about 7% of your cash value. If the remainder of your cash value earns 7% or more, you can keep taking those $10,000 annual withdrawals throughout your retirement. Best of all, policy loans and withdrawals are tax free, as long as you do not take out so much that you strip down your policy With a deferred annuity, by contrast you owe income tax when you withdraw the money. So a permanent life insurance policy can be a unique source of tax free retirement income. Note to get this benefit you need to keep your money in the policy for at least 10 years, probably 20 or more. That is how long it will take for the tax deferred buildup to outweigh the initial sales commissions
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