Permanent life insurance is a term that sounds impressive, but what does it mean? More importantly, how does it compare to other types of life insurance, and is it a good fit for your financial goals?
Understanding the distinction between permanent and term life insurance is the first step in answering these questions. Both types offer a death benefit but differ significantly in structure and long-term benefits.
Permanent vs. Term Life Insurance
While permanent and term life insurance provides a death benefit that is typically tax-free to the beneficiary, the main difference is how long the coverage lasts.
Term life insurance is designed to protect for a specific period, usually 10 to 30 years. During this time, the premiums are often guaranteed to stay the same, making it a relatively affordable option. It’s an excellent choice for those needing coverage for a defined period, such as when paying off a mortgage or supporting young children. Some term policies also offer the flexibility to convert into permanent insurance if your needs change.
Term life insurance, the original type, offers protection for a specific period as long as the premiums are consistently paid. On the other hand, whole life insurance protects the insured’s entire lifetime as long as the premiums are paid. This type of insurance ensures a death benefit and includes an extra feature – the opportunity to build up cash value over time. The policyholder can utilize the cash value at any point during their lifetime for different purposes, including boosting retirement income or funding essential expenses such as education or a down payment on a home. The cash value grows tax-deferred, making it an appealing choice for individuals seeking insurance coverage and a financial asset.
Types of Permanent Life Insurance
Different forms of permanent life insurance are available, each offering distinct features to meet various needs. The following are some of the most prevalent types:
Whole Life Insurance
Whole life insurance is the most basic form of permanent insurance. It provides guaranteed lifetime coverage and builds cash value at a fixed interest rate set by the insurance carrier.
Policyholders can choose different premium payment schedules based on their financial situation. For example, you may pay for the policy over a set number of years (10 or 20) or pay premiums until a specific age, such as 100. Another appealing feature is that many whole-life policies are “participating,” meaning they may pay dividends. These dividends can reduce premiums, add cash value, or increase the policy’s death benefit. Remember that dividends are not assured and are contingent on the insurance company’s financial performance.
Universal Life Insurance
Universal life insurance, much like whole life insurance, offers a benefit upon passing away and the potential to build up cash value as time goes on. The primary difference is that universal life policies offer more flexibility in premium payments.
Once the policy accumulates enough cash value, policyholders can adjust the amount they pay in premiums within certain limits. This flexibility allows people to pay more into their policy during higher-income years and potentially reduce or skip payments later, as long as the cash value covers the insurance costs.
Variable Universal Life Insurance
For those looking for an investment component, variable universal life insurance (VUL) offers the ability to invest the cash value in an account managed by the insurance company. The policyholder can choose how the funds are invested, with options ranging from stocks to bonds.
This variety of policies has the possibility of yielding greater returns, but it also carries increased risk since the investment’s value can change along with the market. The cash value and death benefit may grow if the investments perform well. However, cash value and death benefit could be reduced if the market underperforms. This flexibility and investment opportunity make VUL appealing to those with higher risk tolerance and a desire to grow their insurance policy’s value.
Indexed Universal Life Insurance
Indexed universal life insurance (IUL) balances traditional policies’ security and the growth potential of variable policies. The cash value of the policy is tied to the performance of a particular market index, like the S&P 500, rather than being directly invested in the stock market.
The appeal of IUL is that it typically includes limits on gains and losses. While you won’t experience the entire upside of market performance, you also have some protection from losses during market downturns, making it a more conservative option than VUL. This makes it a good fit for those who want to take advantage of market growth but are still determining the risk.
Particular Types of Permanent Insurance
Some permanent life insurance policies are designed for unique situations or specific needs:
Survivorship Insurance
Survivorship life insurance offers protection for two people and pays out benefits once both individuals have passed away. This type of insurance is commonly used by couples who want to leave a financial legacy for their children or dependents, such as a special-needs child. Business owners also often use it to ensure a smooth ownership transition to the next generation.
Life Insurance for Seniors
Life insurance options are also tailored to seniors, such as simplified issue whole life insurance and guaranteed acceptance life insurance. The following policies usually do not necessitate a medical examination, allowing older individuals who might be ineligible for standard life insurance because of health problems or age to access them. While these policies often have limited benefits, they can provide peace of mind by covering final expenses like funeral costs and unpaid bills.
Riders: Enhancing Your Policy
Permanent life insurance policies can be tailored with riders, which are extra provisions providing additional benefits. For instance, a rider for waiver of premium enables you to cease premium payments in case of disability. In contrast, a guaranteed insurability rider allows you to purchase more insurance later without undergoing a medical exam. While riders increase the cost of your policy, they can be valuable for addressing specific needs.
Conclusion: Choosing the Right Insurance
There’s no one-size-fits-all answer when it comes to life insurance. Whether you’re considering the simplicity of term insurance or the long-term benefits of permanent insurance, the right choice depends on your financial goals, family needs, and risk tolerance. Speaking to a financial advisor can assist you in navigating the intricacies and discovering the most suitable policy for your circumstances. Understanding these options is a crucial first step toward making an informed decision.
