Permanent Life Insurance
Permanent life insurance is the name for any life insurance policy that is projected to last your entire lifetime, as long as the premiums are paid. Rationally speaking and from a cost-to-benefit comparison, permanent life insurance policies may be more rewarding than term life insurance policies. However, the premiums made for permanent life insurance policies are more expensive than term life insurance because your policy is accumulating value over time with your payments fueling the growth of the cash value. If you don’t think you are in the market for long-term commitments for coverage and aren’t interested in the higher premiums, then exploring term life insurance coverage may be best for you compared to permanent life insurance.
Permanent life insurance policies contain two parts: the investment & savings portion and the death benefit. The investment side of the policy builds cash value and gains more value over time depending on the investment performance within the policy as you save with the policy and retain it. One of the major appeals of investing with a life insurance policy is the tax-deferment of the cash value growth. This means that you will not be taxed on the gains of the investment portion of your policy unless you start to withdraw from the policy.
Sometimes, the policy’s cash value can also be used to pay its own premium for a short time if you need or want to stop paying the premium. However, this may lead to underperformance of the policy so before doing so you will want to speak to a life insurance professional to learn the pros and cons. This protection method, along with others such as loans from the policy, are possible since anything you left owing can be deducted from the death benefit. There are three main types of permanent life insurance: whole life insurance, universal life insurance, and variable life insurance.
Whole life insurance is permanent life insurance where your premiums will be predictable and there are some guarantees to the cash value growth going forward. You pay the same amount for your premiums each time they are due, and they are projected to never increase on you. In return, your death benefit is a minimum amount and is projected to only go up. Normally, whole life insurance costs the most per dollar of death benefit. Whole life insurance offers a chance at dividends. When the insurance company does well, they may reward you with dividends and those will increase your death benefit and cash value. The dividend is a portion of the insurance company’s profits that are paid to policyholders as if you were an investor or stockholder.
Universal Life Insurance
Universal Life insurance is permanent life insurance that gives you the flexibility to make payments in adjustable amounts toward your premium, with applicable minimums and maximums. If you have extra cash on hand and want to invest in your policy, you may be able to do that with a universal life policy. You also may be able to pay a lower premium if you are pressed for cash. The death benefit in universal policies is also easier to adjust while the policy is active than a whole life policy’s death benefit. Unlike a guaranteed rate for cash value like a whole life policy, universal life policies act much more like an investment. You may not get a cash value for investing in your policy. Industry shifts and the risk of your insurance company underperforming put your cash value at risk in universal life plans.
Variable Life Insurance
Variable Life insurance is a type of permanent life insurance where the policy owner has control over how the cash value of the policy is invested. You can allocate your cash value among the investments offered by the life insurance company and your death benefit and cash value depending on how well those investments perform over time. This is true investing and should be considered carefully since you can lose value in your policy. With variable life, your insurance company is not as responsible for the investment risk, if at all.
Please reach out if you are considering a permanent life insurance policy to see which one would be the best for your personal situation.