The purpose of life insurance is to protect your family’s financial stability in the case of your untimely demise. Permanent life insurance covers the rest of your life and sometimes has a cash value component. It is a good choice if you’re concerned about running out of coverage before the policy’s term ends.
Although permanent life insurance tends to be more complex and costly than term life insurance, there are situations where it could be prudent to get this coverage.
What Is Permanent Life Insurance?
Permanent life insurance protects the covered person for their whole life. This insurance costs more than term insurance but has a savings component that earns interest tax-free while the death benefit is paid out.
The price of a lifelong life insurance policy depends on your age, health, way of life, and the amount of coverage you want.
When you buy most fixed life insurance, you can pick how long you want to pay each month. You can spend all at once until you hit a certain age, for a set number of years, or the rest of your life. Some of your payment goes to the death benefit, some to the policy fees and changes, and the rest to your insurance’s cash value.
Benefits of Permanent Life Insurance
Permanent life insurance has some advantages, such as:
Guaranteed Payout
In contrast to term life insurance, a fixed life policy promises to pay out. Your loved ones will get a tax-free death benefit from a permanent insurance policy no matter when you die because the policy doesn’t end before you do.
Tax Advantages
The death benefit of a permanent life insurance contract is usually not taxed, and the cash value grows without being taxed right away. As long as the amount you take out is less than the amount you’ve already paid, the money you take out won’t be charged.
Cash Value Benefits
As your cash value grows, you can borrow against the insurance, use it as collateral for a loan from a third party, or take out the cash value to help pay for your retirement.
If you don’t take money out or borrow it, the cash value will grow until it’s enough to cover your premiums for life. You can also close the account and get the equity, the amount in your cash-value account, plus the interest. This is in case you can’t pay the fees anymore.
More Payment Options
Some long-term plans let you set up a “limited pay” feature that enables you to pay higher premiums for a shorter time. Once you pay those premiums, you won’t have to pay them again.
Lifelong Coverage
Unlike term life insurance, permanent life insurance covers your life. You won’t have to think about renewing your policy or running out.
Cons of Permanent Life Insurance
- Getting a permanent policy is much more expensive than a term one.
- Often, the insurance company will take away the same death benefit amount if you borrow money from the cash value and don’t pay it back.
- Monitoring universal and variable policies to ensure the cash value grows and the policy stays in effect is more challenging. This makes them riskier than term-life policies.
Types of Permanent Life Insurance
Permanent life insurance policies are classified into five primary categories: whole, universal, variable, indexed universal, and variable universal. Critical distinctions between these policies include the adjustability of the death benefit and the degree of risk associated with the financial value component.
Universal Life Insurance
This kind of insurance gives you more options than whole life insurance. If you pass a medical test, you might be able to get more money from the death benefit. A cash value account is a savings account that usually gets a money market interest rate. It’s possible to change your monthly payments after the money has built up in your account, as long as there is enough money to cover the costs.
This function could come in handy if your finances have changed quickly. Remember that if you stop or lower your payments and the money you’ve saved runs out, the policy may lapse, and your life insurance will end. The cash value will grow if you buy a specific type of insurance. The following are some of your choices:
Guaranteed universal life: This policy has a sure death benefit and little cash value. The coverage costs much less than regular universal life insurance, and the payments stay the same for the policy’s life.
Variable universal life insurance: Through subaccounts, this strategy lets you put the cash value to work in the market. With variable universal life insurance, you can invest your policy’s sub-accounts differently. Your policy’s cash value will change based on how well these assets do.
Indexed universal life insurance: When you have linked universal life insurance, the growth of the cash value is tied to how well an index does. Popular indices include the Russell 2000, the NASDAQ 100, and the S&P 500. When you tell the insurance company how much of your cash value should go into each investment, they track how well each one does.
Joint Life Insurance
When you buy joint life insurance, you pay one payment for two policies that cover two people. One insurance can cover two people, which can be helpful for estate planning or for a spouse who doesn’t qualify for their policy.
One kind, called “first-to-die,” pays out when one of the owners dies. The other kind, “survivorship life insurance,” pays out when both policyholders die. If you and your partner depend on each other financially, joint life insurance might not be a good idea. Also, if you get divorced, you might want to cancel the policy.
Whole Life Insurance
The most basic choice is whole life insurance, also called ordinary life insurance. This insurance guarantees both the death benefit amount and the rate at which the cash value grows.
Whole-life policies have death benefits that don’t change based on their cash value. These benefits will stay the same for the entire policy’s life. The only time this isn’t true is when the insured takes out a loan against the cash value or withdraws some of it. Either way, the death benefit will decrease unless the insured pays back the total amount plus any interest before they die.
The policyholder can use the cash value as needed while she is still alive, but it goes back to the life insurance business when she dies. This means that the cash value won’t be given to the claimants.
Variable Life Insurance
You have more power over the cash value of your variable life insurance policy. The person who owns the policy can pick which stocks, bonds, and money market mutual funds to put their money in.
If those investments do well, the cash value could grow faster than in whole or universal life coverage. Also, the cash value can be a part of the death payment.
There is a problem with this setup, though. The insured takes on all the risks because they choose the investments. The cash value can go down if their stocks don’t do well. There is also a chance that the death benefit will decrease, though some policies promise a minimum payout.
Permanent Life Insurance vs Term Life Insurance
It’s possible to get both permanent and term life insurance. Each type of plan has its pros and cons. But these types of life insurance are different in three main ways from the foreign policies:
Length of coverage: The words “term” and “permanent” make this clear. A term contract is only valid for a set amount of time, which is called the term. It could be for a specified time or until the cover turns a certain age.
Some policies are in place until a particular debt is paid off, while others are linked to a job or membership in a group. Permanent plans, on the other hand, never run out.
Cost: Because insurance companies have fees they must pay, permanent life insurance with the same death benefit will cost much more than term insurance. Term life insurance is a good choice for people who are on a tight budget because of this. People who buy policies can lower their out-of-pocket costs even more by choosing policies with shorter terms.
Cash value: The only life insurance types with a cash value are fixed ones. The cash value gives the policyholder an extra reason to keep the policy but increases the premiums for permanent plans. The policy’s cash value will grow, and users can access it anytime. In contrast, term insurance only pays out when the policyholder dies.
Conclusion
You can make sure your family will be taken care of after you die by getting permanent life insurance. Permanent life insurance protects you for your life and builds up cash value you can borrow against, cash out, or use to pay your premiums.
However, it is usually much more expensive than other plans. You can pick from different types of permanent life insurance plans based on your budget, financial goals, and the coverage you need.
