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What Is Permanent Life Insurance Coverage

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What Is Universal Life Insurance

What is Permanent Life Insurance

A universal life insurance definition is a type of permanent coverage that offers flexibility. These policies allow you to change the terms of your policy, such as shifting how you pay premiums or increasing or reducing your death benefit.

Unlike a traditional whole life insurance policy, a universal life policy gives you more options for how you pay premiums and allows you to adjust the death benefit over time. In addition, many universal life policies let you build up savings known as cash value that earns interest tax-deferred. You have the option of loans or withdrawals from the cash value of the policy, but you’ll need to pay back the policy loans or your beneficiaries may receive a lower death benefit.

Universal life insurance policies are a variation on whole life insurance. They originated in the 1970s and 1980s.

Do I Need Term Life Insurance

The general purpose of term life insurance is to provide financial protection for your family and other dependents. Its best suited for people who want affordable life insurance for a predefined number of years and wont get that value in other insurance products. It is especially beneficial for people who have major life events occurring during their prime earning years such as getting married, having children, and buying a home.

Its also useful for those with temporary needs such as supporting beneficiaries, paying for their childrens education and paying off debts. In addition, term insurance can be used to replace mortgage insurance.

Variable Life Insurance And Variable Universal Life Insurance

Variable life insurance refers to policies in which cash reserves are invested in securities, stocks, and bonds. In a sense, these policies combine an insurance feature with a mutual fund. That means your investment return is tied to the financial markets’ performance.

Variable universal life insurance is a type of whole life insurance that combines the premium payment and coverage flexibility of universal life insurance with the investment opportunityand riskof variable life insurance.

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Secure Whole Life Insurance

  • The most affordable whole life policy
  • Doesn’t provide dividends
  • Provides the most cash value over the term
  • Earn annual dividends1
  • Policy is paid up in 20 years
  • Advantageous for kids or grandkids or those wishing to finish paying prior to retirement
  • Earn annual dividends1
  • Increase or decrease your premiums as circumstances change2
  • Keep your death benefit level or have it increase as cash value grows

Permanent Life Vs Term Life

Term Life Insurance Advantages and Disadvantages

There are two overarching types of health insurance: permanent life and term life.

Term life is the more common type of policy. However, in recent years, more people have been buying new permanent life insurance policies than term life. COVID-19 has caused many Americans to rethink life insurance and insurance companies have seen an increase in whole life policies.

One major difference between the two types of policies is that permanent is for life. Term is for a specific number of years.

You can buy a term life policy for 10, 20, 25 or 30 years. Term life is usually cheaper and pays out more. Thats because a term life is considered a lower risk to the insurance company.

As long you pay your premium, the insurer must pay out your permanent life insurance death benefit. On the other hand, theres no guarantee that an insurer will have to pay out on a term life policy. Theres a good change youll outlive your term life policy.

“Most people think first and foremost about price and affordability when deciding between term life and permanent life policies, but there are more important considerations like understandability, suitability, and sustainability. Do you understand the products you are considering? Are they the right fit for you? And will you be able to continue to pay for them or fund them?” said Spencer Barclay, founder and CEO at Saveology.

Heres how the two types of insurance compare:

Now, lets take a look the multiple permanent life insurance options.

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Whole Life Vs Universal Life

Whole life and universal life insurance are similar in that they both are forms of permanent life insurance. Your benefits remain in place for your lifetime as long as you pay the premiums.

Both of these types of policies typically allow you to build cash value. If you cancel either type of policy, you receive the cash value minus fees.

However, there are some key differences when thinking about universal vs. whole life, and they mostly come down to flexibility:

  • Whole life has fixed premiums and death benefits.
  • Universal life allows policyholders to change premium and death benefits.
  • Whole life offers a steady interest rate for cash value.
  • Universal lifes interest rate for cash value can fluctuate.

How Much Does Permanent Insurance Cost

Due to permanent insurance’s added benefits, the cost is typically higher than the same amount of term insurance. And whole life tends to cost more than universal life.

Several factors impact the cost of life insurance, including age, gender, smoking, overall health, and the amount of coverage. Permanent life policies are best when taken out at a young age because the premium is lower and won’t increase. Plus, there is more time to build up cash value.

Your specific policy amount will vary, but the following chart based on 2021 rates for health nonsmokers can give you an idea of the cost differences. As you can see, Universal life averages around five times the cost of term insurance for the same coverage amount. Whole life averages approximately ten times the cost of a comparable term policy.

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Cost Of Permanent Life Insurance

Since the insurer is guaranteed to pay a death benefit to your beneficiaries so long as all premiums are paid, permanent life insurance rates are significantly higher than those for term life insurance. A guaranteed universal life insurance policy might be four times the cost of a term policy with similar coverage, while a whole life policy could easily be 10 times the cost.

Most permanent life insurance policies give you the option of choosing how long you want to pay premiums. You can pay for coverage:

  • Your entire lifetime
  • A certain number of years
  • Until you reach a certain age
  • In a lump-sum payment

Of course, should you choose to make fewer payments, youll have much higher rates for each premium payment. But by paying more money early on, you can actually get the benefit of building a larger cash value, since the value is bigger at the start and has longer to grow with interest.

Universal life insurance policies are the only permanent policies with flexible premiums, meaning you can use the cash value to make payments. This can be helpful should an unexpected emergency expense come up.

Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Permanent Life Insurance Explained

Life Insurance Explained: Term vs. Permanent & How to Get the Best Rate

Permanent life insurance policies, such as whole and variable life insurance, provide lifelong coverage and usually contain a cash value component.

Purchasing a permanent policy is an excellent way to ensure your loved ones are financially secure. However, it comes with expensive premiums, so not everyone can afford it.

In this blog post, we will explain everything about permanent life insurance to help you understand whether its worth the investment. So, without further ado, lets get to the topic.

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Tax Benefits Of Permanent Life Insurance

The death benefit for both term and permanent life insurance is paid to your beneficiaries free of income tax. However, permanent life insurance has a few tax benefits that arent available with term coverage:

  • The cash value for permanent life insurance policies grows tax-deferred, similar to gains in a retirement account.
  • If you receive dividends or surrender your coverage, there are no income taxes unless the amount you receive is greater than what youve paid in premiums.
  • There are no taxes if you take out a policy loan, so long as the policy remains in effect . While youre not taxed on other types of loans, this is important in the context of policy loans as you arent actually required to pay the money back to the insurer.

Permanent Life Insurance Benefits

  • Peace of mind for you and financial protection for your family that lasts your entire life
  • Cash value accumulation that can be used for major expenses like college tuition or supplemental retirement income

What is cash value?

Permanent life insurance policies allow the premium dollars you pay to potentially accumulate cash in your policy over time.

This cash value can grow efficiently because a policys cash value grows tax deferred.

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When Should I Buy Life Insurance

While there is no one-size-fits-all timeline for when to buy life insurance, several factors can help you determine when you may want to consider it. In many cases, the younger you are when you purchase life insurance, the more benefits you get out of your policy. Here are a couple of reasons why:

  • Generally, the younger you are when you purchase a life insurance policy, the more likely you are of securing a lower monthly premium.
  • If you choose to purchase permanent life insurance, starting earlier gives you more time for your cash value to grow.

How Does Cash Value Work

Types Of Life Insurance Policies Explained

Part of your premium payment goes towards your cash-value account, which builds value over time. These accounts can accumulate interest and/or returns. Some policies allow you to choose the investment funds associated with your cash-value account. As the account builds value, you may be able to pay your premiums with the money in the account, withdraw it or borrow against it.

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Should I Cash Out My Universal Life Insurance Policy

Whether you should cash out your universal life insurance policy is a highly individual question. Remember that doing so means you no longer will have that life insurance coverage.

However, for some people in dire financial straits, this may be their best or even their only option for getting at cash fast.

The best way to determine if this is the right move for you is to run the numbers on your own. Seek the input of both your insurance agent and an independent financial adviser. Taken together, this combination of research and advice can help you determine if this is the right move for you.

Term Vs Permanent Life Insurance

The primary difference between permanent and term life insurance is that term policies only provide coverage for a fixed period of time, such as 20 years. In addition, term policies dont have a cash value component.

While this makes term life insurance significantly less expensive than permanent life insurance, it also means that you will not receive any benefit if you outlive the policy. You can add a return-of-premium rider to some term policies, meaning you will receive the sum of premiums paid if you live past the term, however, such a rider increases the cost of the policy.

Term life insurance is typically the more suitable choice, since its low cost and most people dont actually require lifetime coverage. As you get older, financial obligations tend to decrease significantly, since fewer people depend on your income and more of your financial obligations have been paid off. Common financial obligations term life insurance can cover include:

  • A mortgage
  • A wedding
  • Student loans

If youre purchasing life insurance to help your family with any of these costs, a cheaper term life insurance policy would be a better fit, since the costs would be paid over time. You can purchase term life insurance coverage for a term of up to 35 years. Even if your child was just born, you can purchase coverage that would last until she turns 25, which would ensure she would be able to pay for college were you to pass away.

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What Can You Do With The Cash Value From A Permanent Life Insurance Policy

Because your policy builds up cash value, it gives you access to money if you need it. The most common way to access your cash value is to take a loan against it. Think of it like a home equity loan. You could take the loan directly from your insurance company or you could use the policy as collateral for a bank loan. One thing to consider if you do this: Your heirs would have to pay back any loan if you were to die .

You could also surrender some or all of the policy someday and take the cash value in its entirety . You would lose your death benefit though, and doing this can have tax implications. So if you go this route, itâs best to work with a financial planner or professional.

Advantages Of Permanent Life Insurance Policies

Permanent life insurance || Insurance Policy

Permanent life insurance policies are distinct from term life insurance policies in several ways. Here are a few of the potential benefits of purchasing a permanent life insurance policy:

  • The policy remains active for your entire life, as long as you pay your premiums: You likely wont have to worry about renewing or extending permanent policies like you would with term life insurance.
  • You typically only have to undergo one medical exam: With term life insurance, you may have to get an additional medical exam if you still want coverage after your term ends, or if you wish to convert your term policy to a permanent policy. Depending on your health and the insurer, a second exam could potentially result in a higher premium. With permanent life insurance, you typically only take one medical exam at the time you purchase the policy.
  • The policys cash value account offers additional financial tools: Permanent life insurances cash value portion gives you an investment vehicle that typically allows you to withdraw or borrow money as needed, with some limitations. While other forms of investment may result in higher returns, this aspect can be an added perk for those who already plan to have a life insurance policy in place for the duration of their life.

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Is Permanent Life Insurance A Good Investment Option

The investment component of permanent policies has merits in facilitating a disciplined investment schedule, ability to access surplus cash when needed, like retirement, and tax-efficient estate transfers. While all of these sound alluring, make no mistake: the primary purpose of permanent life insurance is still protection so that your dependents have financial security when you pass away.

Permanent insurance should not be treated as a primary investment vehicle. The return embedded in such policies, while guaranteed is usually modest. The built-in management fees are higher than what fund managers may charge. There is a cost to accessing such cash during your lifetime.

Premiums for permanent life insurance may be better deployed in alternative investment vehicles such as RRSPs, RESPs or even to pay down your mortgage. So if you have maxed out on some of those registered products, then whole life policies can be a good place to deploy some of your surplus cash.

Types Of Permanent Life Insurance Policies

There are several types of permanent life insurance policies. The primary differences between these policies have to do with how premiums are paid and how the cash value grows over time.

Permanent Life Policy
Level for length of policy.Typically little to no cash value component.

Since theres little cash value component to it, guaranteed universal life insurance is typically the best option if youre interested in permanent coverage without an investment component. While guaranteed universal policies are still much more expensive than term policies, theyre usually the cheapest way to buy permanent life insurance.

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Should You Buy Permanent Life Insurance

Purchasing a permanent policy usually isnât worth it due to the high premiums and low return on investment, which make coverage hard to maintain long-term.

âDue to the lower average rate of return within cash value life insurance policies, we usually only recommend these if other money-saving and investing avenues have already been utilized,â says Patrick Hanzel, Advanced Planning Team Lead and certified financial planner at Policygenius.

A permanent life policy can make sense for people with complex financial needs, including:

  • High-income earners who have maxed out other retirement accounts and need an additional vehicle for tax-deferred savings

Cash Value Within Permanent Life Insurance Policies

Term Life vs. Whole Life Insurance

When you make premium payments on a permanent life insurance policy, a portion of the money goes toward a cash value account. Once you build up the cash value in the account, you can borrow against it or withdraw it. But if youve depleted your cash value and theres not enough money within the policy to cover policy charges, you may have to pony up more premiums in order to prevent the policy from lapsing.

If you took out a loan from the cash value that you havent paid back, the loan amount and interest will be deducted from the death benefit if you pass away.

If you decide you no longer want a permanent policy, you may be able to walk away with some cash value. If you terminate the policy, the insurer will give you the cash value minus any surrender charge.

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Now That You Know What It Is How Do You Get A Policy That Works For Your Needs

Theres one more thing you should know about life insurance: the longer you wait to buy it, the more expensive it typically gets. Dont put things off. If you can purchase life insurance through your employer, thats a great place to start. You can get a basic level of coverage at very attractive group rates but dont assume its enough.

Life insurance is one of the most consequential financial purchases you can make and its worth taking the time to look into all your options in order to get the coverage that best fits your needs. If you have a financial representative you trust, talk to them about your needs. If not, Guardian can connect you with a financial representative who will listen to your needs, tell you about the best ways to meet those needs within your budget, then help you decide. You can also get an online quote using our term life insurance calculator.

If you are an employee, taking advantage of your benefits at work is a smart and affordable way to get the financial protection you want for yourself and your family. Contact your HR department to review your benefit details and determine how much life insurance is available to you. Your employer may provide life insurance as a benefit, or you may opt to pay for additional life insurance through payroll deductions.

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