If you have a Permanent Life Insurance policy designed for maximum Cash Value, you may find that you need to increase the Death Benefit at some point. In this article, I’m going to look at how to efficiently add more Death Benefit protection while still maximizing the Cash Value of your policy. It’s important to remember that in a Maximum Over-funded Policy, the goal is to keep the Death Benefit to an absolute minimum. That’s how we get a policy with the most Cash Value.
But what do you do when you want more Death Benefit than the policy is providing? How do you balance your need for Death Benefit with your focus on cash accumulation? Rather than tinkering with your optimized policy, the best approach may be getting extra term Life Insurance.
The goal of this article is to make you aware of how you can inexpensively and efficiently add additional Death Benefit protection with staggered term policies.
Why Separate Term Policies?
Term Life Insurance costs significantly less than permanent insurance on a dollar-for-dollar basis. By using term to raise your total Death Benefit, you avoid driving up the cost of insurance charges in your Cash Value policy. This saves premium dollars for the Cash Value.
The difference in costs is apparent in this table.
The Table shows two policy illustrations for a healthy 40-year old. The illustration on the left is a maximum over-funded policy design based on a $24,000 premium. The premium is being paid for only 10 years, then the Death Benefit is being reduced to drive costs out of the policy.
The Illustration on the right is showing a policy with exactly double the Death Benefit of the first. However, the premium has been left at $24,000 per year. You can see that the Cash Values are slightly lower through the first 10 years. This is because the costs of the higher Death Benefit impact the growth of the Cash Value.
Both policy illustrations show the Death Benefit being reduced to the legal maximum once premiums cease. The Cash Value growth is roughly the same during the next 20 years.
Lock In Lower Rates
Getting term policies while young locks in lower premiums based on your age bracket. As you get older, the cost of Term insurance rises. By staggering policies of different lengths (10, 20, 30 years), you maintain budget-friendly rates as you age.
Permanent policies are less flexible over time. Term life allows you re-align Death Benefit needs as priorities shift. You can drop term coverage if no longer required or exchange for longer/shorter terms.
Can Shop For Best Prices
Life insurance companies generally have a niche. While they all offer Term, Whole Life and Universal Life, their best deal may be on just one of those three. When I’m looking for the best Term policies for my clients, I usually find that other companies have the best rates. You might even end up using three different companies for each of your staggered policies.
Why Staggered Term Policies?
Optimize Cost Efficiency
One of the primary advantages of using staggered term policies is the ability to tailor coverage to specific needs over time. By combining shorter and longer-term policies, you’re strategically aligning coverage periods with financial responsibilities. This ensures that you’re not paying for unnecessary coverage as your financial obligations naturally decrease over time.
The essence of a maximum over-funded policy lies in accumulating substantial Cash Value. By minimizing the Death Benefit to the legal limit for a given premium, you’re ensuring that the cost of insurance remains low, directing more funds into the Cash Value component. Staggered term policies complement this strategy by efficiently covering the necessary Death Benefit while preserving the core focus on Cash Value growth.
Increasing Death Benefit
It’s also important to realize that the Death Benefit in a maximum over-funded policy is always increasing. That means that the need for added Death Benefit from the term policies decreases over time. Staggered term policies allow the shortest Term to drop off when no longer needed.
This graph is based on the policy illustration from the Table above. We are assuming that our 40-Year old Client has a need for $2,000,000 of Death Benefit through 30 years. The idea is that their house will be paid off, their kids will be through college, and they will have retirement savings to offset their protection needs.
The Blue line on this graph represents the Death Benefit of our permanent Life Insurance policy. You can see that the Death Benefit reduction at Year 10. You should also note that there is no net change in the Death Benefit of the permanent policy between Year 10 and 20. This means that we will not need a separate 20-year term policy. We will be able to get by with just a 10-year and a 30-year policy.
You can see that a $260,000 10-Year and a $1.3 Million 30-Year Term policy will provide close to $2 Million of total Death Benefit protection for 30-Years. Because of the Death Benefit reduction, we could also opt for a 20-Year Term for $260,000 instead. This would fill the gap after the Death Benefit is reduced.
It is important to realize that as the Death Benefit increases on the permanent policy, the need for additional term insurance diminishes. This is why we don’t need to replace the $260,000 DB of the 10-Year Term when it expires.
Adopting a staggered term policy approach can be the linchpin for those seeking to optimize their Life Insurance strategy. By customizing coverage periods, preserving maximum Cash Value, and strategically building wealth, policy owners can confidently navigate the intricacies of Life Insurance while simultaneously growing their financial assets.
Disclaimer: This blog post is for informational purposes only and does not constitute financial or investment advice. Please consult with a financial professional before making any financial decisions.
 Preferred Non-tobacco rating.
 One very important thing to note here is that the policy on the right CAN take up to $48,000 premium per year. This means that if you want the flexibility to increase premiums in the future, it doesn’t cost that much more to allow for this flexibility. This policy will be maximum over-funded at $48,000 per year.