One of the biggest drawbacks of the coverage offered through the Federal Employees’ Group Life Insurance program (FEGLI) is that it doesn’t build any cash value. All of your FEGLI options – Basic plus Options A, B, and C – are term life insurance products that only offer a death benefit over a set period of time. On the other hand, Permanent Life Insurance offered through private-sector insurers builds cash value that can be withdrawn when you need it or used as a stream of income in retirement.
Two Basic Types Of Permanent Life Insurance
Whole Life Insurance is a permanent policy that provides coverage for life and builds cash value that you can access at any time for any reason. Depending on how the policy is written, it may be eligible to earn dividends that increase the death benefit and cash value.
Universal Life Insurance also provides lifetime coverage and builds cash value plus it enables you to raise or lower premium payments within certain limits. Like Whole Life, you can access the cash value of your Universal policy for any reason including using it to make your flexible premium payments.
“Of course, withdrawals or regular distributions from your cash value will reduce the amount of the death benefit for your beneficiaries.”
How Permanent Life Insurance Provides A Stream Of Income
Permanent Life Insurance offers a savings component that increases the policy’s cash value over time. You can take withdrawals from the accrued cash value for any reason. Even better, certain Whole Life Insurance policies are structured to provide regular distributions instead of lump-sum withdrawals. When you think about it, you can use these funds to delay taking taxable distributions from your traditional Thrift Savings Plan (TSP). Of course, withdrawals or regular distributions from your cash value will reduce the amount of the death benefit for your beneficiaries.
Permanent Life Insurance Provides Tax Advantages
Withdrawals from the cash value of your policy are usually tax-free as long as the amount doesn’t exceed the premiums you’ve paid. Add to this, the cash value of your policy grows on a tax-deferred basis. If you have the type of Whole Life policy that pays dividends, these payments are also tax-free as long the amount doesn’t exceed your total premium payments. When you pass away, your beneficiaries will not owe income taxes on the death benefit they receive.
At the end of the day, these and other types of insurance products can be a strategic component of your retirement plan depending on your needs. Consider working with an FRC® trained advisor who can help you compare policies and design a plan that offers peace of mind in retirement.
