Intro to Permanent Life Insurance

Intro to Permanent Life Insurance

Whole life insurance covers you as long as you live builds cash value, but it costs quite a bit more than term life insurance.

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What is Permanent Life Insurance

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Whole life insurance is a life insurance policy that provides coverage for life. It is guaranteed to pay out the death benefit to your beneficiaries as long as the premiums are paid up and the policy is in effect at the time of death. These types of policies also contain a savings account, called a "cash value account" that you can withdraw from or borrow against.

With term insurance there is a risk that you could outlive the coverage period. In that case the death benefit would not pay out and you would have to either renew your policy or apply for a new one. No such risk exist with a whole life policy, but it will cost you quite a bit more. While there are many different types of whole life insurance, they are commonly known for smaller face amounts and most often used to pay off smaller expenses such as funeral costs. The cash value that builds in the policy is one of the most important benefits of this policy type. It can be used to pay premiums, borrow against if you get into a pinch, or even pay for your kid's first car.

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Types of permanent life insurance

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Whole life insurance - These policies have fixed premiums and a cash value account that accumulates over time, although at a pretty slow rate. You will not be supplementing your retirement income with the cash value here. But you can borrow against it when you get into a tight spot. If you choose not to pay back the policy loan, the amount will be taken out of the death benefit of the policy.

You also have a lot of flexibility in the way you can pay for a whole life policy. Insurers may offer you the ability to pay your policy premiums in one lump sum or even pay off your policy early up to age 100. These payments are usually preset for a fixed number of years (10, 15, or 20). At that point the policy is "paid up" and you will still have coverage even though you are no longer paying premiums. In these flexible premium pay options, your beneficiaries normally receive only the face value of the policy, no the face value plus cash value.

Universal life insurance - this type of permanent coverage is attractive because it is incredibly flexible. Unviersal life policies allows you to adjust your premiums and death benefit as your financial situation changes. You can also give your beneficiaries a larger payout by combining your death benefit and cash values in the policy. However it is important to note that these types of universal policies are more expensive than ones that do not inlcuded the cash value with the death benefit. Indexed universal life insurance or "IUL" is a specific type of universal life insurance that is tied to a stock index like the S&P 500. A "fixed" IUL  allow you to participate in some of the market gains without the downside of losing any of the cash value in the policy if the market were to have a down turn.

Variable life insurance - Variable life insurance offers policyholders the opportunity to put their cash value in an investment account that is managed by the insurance company. Earnings in the account can be used toward premiums or added to the death benefit. The "variable" in variable life insurance applies to the cash value account and possibly the death benefit. This means if the investments the insurance company makes with your cash values go poorly, you could lose the cash in the policy and the death benefit may decrease. However, the premiums you would pay into this policy remain fixed.

Variable universal life insurance - Variable universal life (VUL) insurance policy can be a complex but the potential to earn high cash values could make it enticing for the "'investment minded" consumer. The policy's cash value is subject to the  gains and losses  in the investments you choose. Just as in a normal UL policy, in a VUL policy,  you still have the flexibility to increase or decrease your premiums as long as they are within the minimum and maximum limits of your contract. However,  that added flexibility is not without risk. If your investments don't work out, in the worst case scenario you could end up owing money or losing your coverage altogether.

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Does permanent coverage make sense for you?

Maybe. While permanent coverage is more expensive than term there are quite a few added benefits baked into that cost. There are investment opportunities, flexible premiums (depending on the policy type), and there is no risk of outliving the term of the policy. It really depends on the reason you are shopping for life insurance in the first place. There is a good chance permanent life insurance play a role in your overall plans. Not sure what your needs are? Feel free to reach out to one of our advisors for a free consultation. We'd love to help you put a plan together to protect your family and your future! 

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