Permanent life insurance policies, such as whole and universal life insurance, offer lifetime coverage and typically have a cash value component. The cash value of a permanent policy grows over time and can be used to pay premiums or borrow from the insurer.
Since permanent life insurance policies have much higher rates than term policies, and most financial obligations disappear over time, term life insurance is often the best option for you. most people. however, if you need coverage for life and have the means to pay for permanent coverage, it can be a great way to make sure your loved ones are financially protected.
what is permanent life insurance?
Permanent life insurance refers to a set of life insurance policies that provide coverage for your entire lifetime, as long as premiums are paid. therefore, whether you die immediately after purchasing coverage or 50 years later, your beneficiaries would receive a death benefit. Most permanent life insurance policies also have a cash value component, which is similar to an investment account. you can withdraw or borrow from the cash value of your policy once it is large enough.
Also, if you have a participating policy from a mutual life insurance company, permanent policies may pay dividends. Mutual life insurance companies are owned by their policyholders, so if the insurer brings in more money than it spends, the profits are distributed as dividends. these dividends can be taken in cash, used to pay premiums, or to pay for additional coverage.
cash value of permanent life insurance
Each time you pay a permanent life insurance premium, a portion of the money is deposited into a cash value account, and this account grows at a rate specified by the policy. once the cash value has reached a certain size, you can borrow money from the insurer and use it as collateral.
Policy loans require no credit checks or qualifications, as the insurer holds the money to cover the loan, and the loan does not have to be repaid within a set period of time. however, you are charged a small interest rate on policy loans. Also, if the loan plus unpaid interest exceeds the size of the cash value, your policy will lapse and you may lose your coverage. Finally, if you die before the loan is repaid, the loan amount will be deducted from the death benefit your beneficiaries receive.
For some permanent life insurance policies, you can also pay premiums using the cash value of the policy. This option is generally only available with universal life insurance policies and is somewhat risky because your policy will lapse if its cash value reaches zero.
Cash value permanent life insurance offers a measure of protection in that if you ever decide to assign your coverage to the insurer, you’ll get the cash value back. During the first few years of coverage, there are surrender charges, so you won’t get the full cash value accumulated. however, you will still be able to get back a portion of the money you paid.
Keep in mind, however, that cash value is separate from a permanent life insurance policy’s death benefit, so when you die, your beneficiaries typically won’t receive any of the cash value.
types of permanent life insurance policies
There are several types of permanent life insurance policies. the main differences between these policies have to do with how the premiums are paid and how the cash value grows over time.
Because it has little cash value, guaranteed universal life insurance is often the best option if you’re interested in permanent coverage without an investment component. Although guaranteed universal policies are still much more expensive than term policies, they are often the cheapest way to buy permanent life insurance.
final expense insurance
There are some whole life insurance policies that are marketed as final expense insurance or burial insurance, which are low priced. however, these tend to have death benefits capped at less than $50,000, so the cost per dollar of coverage is quite high. Final expense insurance policies are expensive because they usually don’t require a medical exam or are “guaranteed acceptance,” meaning they can’t turn you down. Since the insurer takes on a much higher risk, the cost of coverage can be incredibly high.
exception to the rule: expiration dates
In most cases, permanent life insurance will provide coverage for your entire life. however, policies are often sold with an expiration date that is tied to your age. If the policy reaches its expiration date and you are still alive, the insurer will usually pay you a sum of money and the coverage will cease. the amount of money can be the policy’s death benefit, its cash value, or a predetermined sum.
Whole life insurance policies are typically structured to expire when you turn 100, at which point the cash value must equal the death benefit. Universal life insurance policies, on the other hand, often specify in the policy what age it expires. this has caused problems for some universal life policyholders, as policies were once sold with expiration dates of 85 years.
If they lived past their policy expiration date, policyholders lost their coverage and received little cash value in return, since the funds had been used to pay premiums. this is less of an issue now, as you can usually specify an expiration date of up to 121 years when you purchase the coverage.
term vs permanent life insurance
The main difference between permanent life insurance and term life insurance is that term policies only provide coverage for a fixed period of time, such as 20 years. also, term policies do not have a cash value component.
While this makes term life insurance significantly less expensive than permanent life insurance, it also means you won’t receive any benefits if you outlive the policy. You can add a return-of-premium rider to some term policies, which means you’ll get back the sum of the premiums paid if you live beyond the term; however, said additional clause increases the cost of the policy.
Term life insurance is often the most appropriate option as it is low cost and most people do not actually require lifetime coverage. As you age, financial obligations tend to decline significantly as fewer people rely on your income and more of your financial obligations have been paid. Common financial obligations that term life insurance may cover include:
If you’re buying life insurance to help your family with any of these costs, a cheaper term life insurance policy would be a better option, since the costs would pay off over time. You can purchase term life insurance coverage for a period of up to 35 years. Even if your child was just born, you can buy coverage that will last until your child’s 25th birthday, ensuring they can pay for college if you die.
Permanent life insurance policies are more appropriate if you have significant financial obligations that are not urgent. For example, if you have enough assets for your family to pay estate taxes when you die, you could purchase permanent coverage to help cover the tax bill. In this case, you’ll probably want a guaranteed universal policy, since it provides a death benefit up to age 121 (or whatever age you choose).
See also: Long Term Care Insurance Companies
Permanent life insurance policies with a cash value component generally make sense if you need coverage for life and have a large investment portfolio that you want to diversify.
When it comes to underwriting, term and permanent life insurance policies are quite similar. You can choose a fully underwritten policy, which requires a medical exam but costs less. Alternatively, you can purchase a policy without medical coverage, although these tend to have a limited death benefit and cost more.
One restriction is that guaranteed acceptance life insurance policies are available only with permanent coverage. however, few people really need these policies, which are very expensive and restrict your death benefit to less than $25,000. Considering that insurers will accept the vast majority of medical problems, we would not recommend a guaranteed acceptance policy unless you have a serious condition or are unable to manage daily activities on your own.
tax benefits of permanent life insurance
The death benefit for term and permanent life insurance is paid to your beneficiaries free of income taxes. however, permanent life insurance has some tax benefits that are not available with term coverage:
what if you need term and permanent life insurance?
Depending on your financial situation, you may need a certain amount of permanent coverage, as well as a certain amount of coverage for a certain period of time. In these cases, you have a few options for combining term and permanent life insurance:
cost of permanent life insurance
Because the insurer is guaranteed to pay a death benefit to its beneficiaries as long as all premiums are paid, permanent life insurance rates are significantly higher than term life insurance. A guaranteed universal life insurance policy could cost four times the cost of a term policy with similar coverage, while a whole life policy could easily cost 10 times.
Most permanent life insurance policies give you the option of choosing how long you want to pay premiums for. can afford coverage:
Of course, if you choose to make fewer payments, you will have much higher rates for each premium payment. But by paying more money up front, you can get the benefit of building more cash value, since the value is higher up front and has more time to grow with interest.
Universal life insurance policies are the only permanent policies with flexible premiums, which means you can use the cash value to make payments. this can be useful in case an unexpected emergency expense arises.
Alternatively, you can choose not to touch the policy’s cash value until it’s quite large and then simply skip paying premiums later in life. however, this benefit is available only if you have paid enough into the policy that it has a substantial cash value. In addition, you should carefully monitor the cash value, as costs may increase or the policy may not achieve projected returns. If the cash value of the policy is exhausted, you will lose your coverage.