By purchasing permanent life insurance, you can guarantee your loved ones’ financial security after you pass away and continue to assist them. A permanent life insurance policy provides a benefit in the event of the death of the policyholder. To decide if permanent life insurance is correct for you, consider the information below. Consider enlisting the aid of a qualified financial advisor who serves your area if you want practical advice on determining whether permanent life insurance is right for you.
The examples of permanent life insurance policies which offer perpetual coverage are whole and universal life insurance policies. These policies also include a cash value element. The cash value of a permanent policy increases over time and can be accessed to cover premiums or obtain a loan from the insurer.
Term life insurance is often a preferable choice for most people because permanent life insurance policies have substantially higher rates than term policies, and the majority of financial commitments eventually disappear. However, permanent coverage might be a terrific approach to make sure your loved ones are financially secure if you require lifetime coverage and have the money to pay for it.
Although it normally lasts for your entire life and accrues cash value, permanent life insurance is more expensive than term life. You can choose between term and permanent life insurance when looking for it. Although most people only need term insurance. Permanent life insurance frequently provides everlasting coverage and the chance to accumulate cash value that can be used as collateral for loans, making it appropriate for some applicants even though term plans are usually adequate.
What is permanent life insurance?
As long as you’ve paid your premiums on time, permanent life insurance typically provides coverage for the remainder of your life and pays out regardless of when you pass away. These kinds of insurance policies also have a cash value component that you can borrow against or withdraw while you’re still living. Depending on the terms of the policy, you might be able to modify the amount of coverage and the premium payments to suit your needs.
Permanent life insurance refers to a group of life insurance policies that offer protection for the duration of your life. Therefore, your beneficiaries would receive a death benefit regardless of when you die away—50 years after acquiring coverage or shortly after. A cash value component, which is akin to an investing account, is a feature of the majority of permanent life insurance policies. Once your policy’s cash value reaches a certain amount, you can withdraw it or borrow against it.
Permanent plans can also pay out dividends if you have a participating policy from a mutual life insurance firm. Since policyholders own mutual life insurance firms, any surplus funds are paid out as dividends. These dividends can be withdrawn as cash, put towards premiums, or used to purchase more insurance.
The term “permanent life insurance” refers to all non-expiring life insurance policies. The two main types of permanent life insurance are whole life and universal life, and the majority of them combine a savings component with a death payment. Whole life insurance provides coverage for the insured’s whole lifetime, and the funds can increase at a fixed pace.
Once you’ve chosen the plan that’s ideal for you, don’t forget to properly investigate the companies you’re considering to make sure you’re getting the greatest life insurance possible.
Types of permanent life insurance
There are numerous options available to you if you decide to get a permanent life insurance policy while looking for life insurance. Your choice will be based on how much risk you can tolerate and how much flexibility you need.
Whole life insurance
Whole life insurance policies have set premiums and an accumulating cash value element.
Different payment plans, including paying premiums until the age of 100, paying premiums for a set period of time (such as 10, 15, or 20 years while keeping coverage after payments stop), and single-payment policies, may be provided by insurers. Your beneficiaries normally receive the face value of the policy, not the face value plus cash value, when you pass away.
You might wish to think about using the cash value over your lifetime to make the most of your permanent insurance. However, the insurer will cut the death benefit by the same amount if you borrow or withdraw more money than the policy base (the amount of premiums you have paid) without paying it back.
Universal life insurance
The fundamental benefit of universal life insurance is that you can vary the premiums and death benefit as your financial situation changes, giving you flexibility. Additionally, you can raise the payout to your beneficiaries by combining the cash value with the death benefit. There is a special kind of universal life insurance called “indexed universal life insurance” connected to an S&P 500-style stock index. In terms of premium flexibility and death benefits, it is comparable to universal life.
Variable life insurance
Variable life insurance allows policyholders to invest their cash value in a variety of financial products, which can make it riskier than whole or universal life insurance. You have the choice to add on the monetary value in the death benefit, just like with universal life. Most premiums are set, and cash value returns are not always guaranteed.
Variable universal life insurance
What results from the union of variable life with universal life? You can obtain variable universal life, or VUL, a complex form of life insurance. The fluctuation of your chosen investments will affect the policy’s underlying cash value. Your death benefit and premium payments are both modifiable. But there are dangers associated with this increased freedom. You can find yourself in debt or perhaps lose the coverage if your investing decisions don’t work out as you had intended.
Permanent life insurance comes in more specialized forms such as survivorship policies, which are a type of family life insurance. These contracts pay out when the second individual passes away and insure two lives simultaneously, usually spouses.
Cost of Permanent Life Insurance
Permanent life insurance premiums are much higher than those for term life insurance since the insurer is required to pay a death benefit to your beneficiaries as long as all premiums are paid. A whole life insurance policy may easily cost ten times as much as a guaranteed universal life insurance policy, which might cost four times as much as a term policy with comparable coverage.
You often have the choice to select the length of time you wish to pay premiums for your permanent life insurance policy. You can pay for protection by:
- All of your life (annually or monthly)
- A specific period of time (such as 20 years)
- Up to a particular age (such as 65)
- In a single payment
Naturally, the rates for each premium payment will be substantially greater if you decide to make fewer payments. However, since the value is higher at the outset and has more time to increase with interest, paying more upfront can actually result in a larger cash value. Only universal life insurance policies offer flexible premiums, allowing cash value to be used as payment. If an unforeseen emergency expense arises, this can be useful.
Alternatively, you could decide to wait until the cash worth of the policy has grown to a sizable amount before using it, and just forgo paying premiums in the future. However, you may only take advantage of this benefit if you have sufficiently funded the policy’s cash value. Additionally, you need to keep a close eye on the cash value because costs can go up or the policy might not generate the expected returns. You will no longer be covered if the cash value of the insurance is exhausted.
Permanent Life Insurance Tax Benefits
Both term and permanent life insurance death benefits are given to your beneficiaries tax-free. However, there are a few tax advantages with permanent life insurance that aren’t present with term coverage:
- Similar to earnings in a retirement account, permanent life insurance plans’ cash values increase tax-deferred.
- There are no income taxes if you receive dividends or give up your insurance coverage unless the amount you receive exceeds what you paid in premiums.
- If you take out a policy loan while the policy is still in force (i.e., the total of the loan, interest, and cash value does not exceed the cash value), there are no taxes to pay. Even though you aren’t taxed for other loans, this is significant for policy loans because you aren’t actually compelled to pay the money back to the insurer.
Permanent vs. Term Life Insurance
The main distinction between term and permanent life insurance is that term policies only offer protection for a set amount of time, such as 20 years. Term insurance policies don’t include a cash value component either.
This lowers the cost of term life insurance dramatically compared to permanent life insurance, but it also eliminates any benefits for outliving the coverage. Some term policies allow you to add a return-of-premium rider, which guarantees that you will get your money back if you live past the term. However, this increases the price of the insurance.
Permanent life insurance lasts the insured’s lifetime (thus the name), unless nonpayment of premiums causes the policy to lapse, in contrast to term life insurance, which guarantees the payment of a defined death benefit for a specific number of years.
The money paid in premiums for permanent life insurance supports both the policy’s death benefit and its ability to accrue cash value. To help fulfill needs like paying for a child’s college education or covering medical costs, the policy owner can borrow money against that cash value or, in some cases, withdraw cash altogether.
After acquiring a permanent life insurance policy, there is frequently a waiting period during which borrowing from the savings part is not allowed. This enables the fund to accumulate enough cash. When the sum of the unpaid principal and accrued interest on a loan exceeds the cash value of the insurance policy, the insurance policy and any associated coverage expire.
Policies for permanent life insurance are treated favorably by the tax code. As long as the policy is active, the cash value growth is typically tax-deferred, meaning the policyholder doesn’t pay taxes on any earnings. Money can also be withdrawn from the policy tax-free because policy loans are often not regarded as taxable income, provided certain premium caps are met. In general, withdrawals up to the total amount of premiums paid are not subject to tax.
Given its low cost and the fact that most people don’t actually need lifelong coverage, term life insurance is frequently the better option. Financial commitments typically reduce dramatically as you age since fewer people rely on your income and more of your debts have already been paid off. Typical financial commitments that term life insurance can protect against include:
- The mortgage
- Education of a child
- To replace lost income
- A marriage
- Education loans
Since the costs would be spread out over time, a less expensive term life insurance policy would be more appropriate if you were buying life insurance to assist your family with any of these expenses. For a length of up to 35 years, term life insurance is available. Even if your child is still a newborn, you can obtain insurance that will pay for college expenses for her if you pass away up until the age of 25.
If you have large debts that are not time-sensitive, permanent life insurance policies are a better choice. You may buy permanent coverage to help pay the tax obligation, for instance, if you have enough assets that your family would be required to pay estate taxes upon your passing. Given that it offers a death benefit up until age 121 in this situation, a guaranteed universal policy is likely what you desire (or whatever age you choose).
If you need lifelong coverage and have a sizable investment portfolio that you want to diversify, permanent life insurance plans with a cash value element are often a good choice.
Underwriting
Term and permanent life insurance plans are very similar in terms of underwriting. You can select a fully underwritten insurance, which is more expensive but necessitates a medical checkup. You can also get a no-medical policy, but they usually have a smaller death benefit and are more expensive.
One limitation is that only permanent coverage is offered with assured acceptance life insurance policies. Few individuals actually require these policies, which are quite pricey and have a death benefit. We wouldn’t advise a guaranteed acceptance insurance unless you have a severe ailment or can’t do everyday activities on your own because insurers will accept the great majority of medical conditions.
What if you require both term and permanent life insurance?
- Different people have varied insurance needs based on the different times in their life. Although term life insurance is preferred because of its affordable rates, it typically expires far before the policyholder’s life.
- Some people may discover that they’d prefer ongoing coverage and savings opportunities may want a new permanent policy, even though the goal is to have paid off the majority of debt and other financial obligations by that time—while also accumulating enough savings to make a significant amount of life insurance unnecessary.
- For this reason, a lot of term life insurance policies give the opportunity to change to permanent coverage at a later time, frequently without the requirement to re-qualify medically or otherwise. Someone with chronic diseases that necessitate ongoing expenses paid from the savings component or with medical difficulties that could make a new policy prohibitively expensive would find the conversion interesting because of this aspect.
- Permanent life insurance premiums are considerably higher than those for term insurance, but those who would purchase such policies have amassed sufficient wealth by that point in their lives to be able to pay for them. Due to the additional savings potential, they can also use it as a tax-advantaged investment vehicle to fund the needs of lifelong dependents or for estate planning.
Alternatives to combine term and permanent life insurance
You can require a specific amount of permanent coverage as well as a specific quantity of coverage for a predetermined amount of time, depending on your financial condition. In these circumstances, you have a few alternatives for combining term and permanent life insurance:
- Term-based permanent life insurance: Before purchasing coverage, make sure that the permanent life insurance policy you want offers term riders. In that you can increase coverage in years when you have more significant financial responsibilities, such as up until your mortgage is paid off, a term rider functions similarly to a term policy.
- Term and permanent life insurance: You can buy a term life insurance policy in addition to your permanent policy if you are unable to add a term rider. With considerably less expense than if you had purchased a larger permanent policy, this enables you to enhance your overall coverage when you require a higher combined death benefit.
- Life insurance that can be converted: A convertible term policy is an option if you believe you will only require term life insurance but are unclear of your needs in the future. This term life insurance coverage has the option to change to permanent life insurance at a later time without having to reapply. Therefore, the cost of your permanent insurance would be determined by your initial health rating if you were to be diagnosed with a medical condition that would make a new policy prohibitively expensive. The policy may only be convertible after a particular number of years have passed or when you reach a certain age, so you need to find out when this will be the case.
Does buying permanent life insurance pay off?
When looking for permanent life insurance, there are a number of things to take into account, including longevity, price, and flexibility. Permanent insurance may be advantageous for those who:
- No matter when they pass away, you need coverage.
- wishing to leave an inheritance via life insurance.
- In need of life insurance to pay for ultimate costs.
Because it provides everlasting coverage and investment options, permanent life insurance is often more expensive than term life insurance. Also keep in mind that some policies necessitate careful investment attention, which you might not have the time or want to do.
Would it be a good idea to buy permanent life insurance?
Not everyone benefits most from permanent life insurance. In general, it benefits those with high incomes. It’s crucial to keep in mind your long-term objectives and needs.
Some of the factors that can prompt someone to buy permanent life insurance are included below.
- As a business owner
Business owners who are searching for a policy that provides financial security and accrues cash value can think about purchasing permanent life insurance. You can pay the insurance premiums out of the cash value. To pay for company expenses, it can either be withdrawn or borrowed.
- You have a keen interest in estate planning
Because permanent life insurance offers your heirs another source of income, it may be a wise investment if you’re constructing an estate plan. For instance, your estate’s net value may exceed the amount that is exempt from taxes at the time of your passing. You can pay the costs out of the payouts from your life insurance policy.
- You want to find more tax-free investment alternatives
Permanent life insurance’s cash value is tax-free. Furthermore, it develops with time. As you prepare for retirement, that makes it a new investment.You can also decide to withdraw from or take out a tax-free loan against the cash value of your insurance when you need it.
- A lifelong dependence or you are the only supporter
When facing financial difficulties, permanent life insurance can support a solitary provider. Due to the cash value component, which can be withdrawn or loaned, this is true. Furthermore, following the policyholder’s passing, the death benefits may be used to pay for ongoing expenditures like rent or medical bills. When times are tough, this might assist the policyholder’s dependents.
- You might need long-term care
You can include different riders based on your needs. Long-term care insurance is one of these. If you’re concerned about the chance of requiring long-term care due to a sickness or illness, this is an excellent addition.The plan’s death benefit may be used in whole or in part to pay for long-term care costs if you add this rider to the policy.
- You owe a large debt
The adaptability of some permanent life insurance plans might aid in debt repayment. While paying off your obligations, you can also lower your death benefits and save money on premiums. Additionally, the accrued cash value can be withdrawn to pay off obligations more quickly.
Permanent Life Insurance Cash Value
A portion of each permanent life insurance premium payment is deposited into a cash value account, which increases at the rate set forth in the policy. You are permitted to borrow money from the insurer and utilize the cash value as collateral once it reaches a specified amount.
Since the insurer has the funds to support the loan, there are no credit checks or other requirements for policy loans. Additionally, the loan is not required to be repaid within a specific time frame. On insurance loans, you do, however, pay a tiny interest fee. Additionally, if the total of the loan and accrued interest is greater than the cash value, your insurance will expire and you risk losing your coverage. Finally, the loan amount will be subtracted from your beneficiaries’ death benefit if you pass away before the loan is repaid.
You may also use the policy’s cash value to pay premiums for some permanent life insurance policies. This option is typically only available with universal life insurance policies and is relatively dangerous because your policy will expire if its cash value approaches zero.
Permanent life insurance does provide some security thanks to its cash value because you would receive it back if you ever decided to cancel your policy and gave the insurer your money instead. There are surrender fees during the first several years of coverage, so you wouldn’t obtain the whole amount of accumulated cash value. You would be able to recuperate some of the money you paid, though.
However, keep in mind that the cash value of a permanent life insurance policy is distinct from the death benefit, so in the event of your passing, your beneficiaries won’t normally receive any of the cash value.
Advantages of permanent life insurance
Having coverage for the rest of your life and a cash value component that can increase over time are the two greatest benefits of purchasing a permanent life insurance policy. By doing this, regardless of when you pass away, you may rest assured that your beneficiaries will be cared for.
- Permanency
A permanent life insurance coverage can last your entire life as long as you pay the premiums on time. While a term policy is valid for a set period of time, if you still require insurance beyond that time, you will likely need to replace it. Due to your age or health difficulties by then, you might have more difficulty getting insurance—or receiving it at a reasonable price. The choices available to people whose term insurance plans expire, however, are frequently greater than they are aware.
- Predictability
Your death benefit and premiums for a full permanent life insurance policy remain the same. Both types of variable life insurance expose you to the ups and downs of the markets. Whole life insurance may be a preferable option for those who desire a permanent policy but are uneasy about taking on investment risk.
- Excise taxes
The cash value in a permanent life policy increases tax deferred, just like it does with the other types of permanent life insurance. The interest and dividends on that money would be taxed annually if it were in a regular, non-retirement investment account. Additionally, because life insurance benefits (the death benefit that is paid to the beneficiary) are typically not taxable, those investment gains may completely avoid being taxed.
- Potential loan security
As previously stated, after a certain time, policyholders can borrow against the cash value of their policies. That might be helpful in a time of financial crisis for someone who has used all of their other borrowing options. And unlike conventional loans, individuals are not required to pay the money back if they are unable to or do not want to. There are certain important limitations to keep in mind, one of which is that if they pass away before repaying the policy, the death benefit will be diminished proportionally.
- Amounts accumulated in cash
Once more, many permanent life insurance policies include a cash value element that increases your death benefit and serves as an inflation hedge. In essence, your policy’s cash value increases the value of your death benefit over what it would be without it. Additionally, if your cash worth increases, you can withdraw it or borrow against it to boost your retirement income. This money is regarded as tax-free income if you decide to take out a loan.
- Multiple premium payment options
There are some permanent life insurance policies that allow you to cease making payments while still receiving the coverage’s benefits, which is another perk of this form of insurance policy. For instance, some policies would let you pay greater premiums for a shorter period of time, like 10 years, after which you wouldn’t have to pay a premium again.
- Extra tax advantages
Numerous tax benefits are provided by permanent life insurance contracts. A tax-free death benefit, tax-deferred cash value growth, income tax-free dividends, and tax-free policy loans and withdrawals are a few of these benefits.
Disadvantages of permanent life insurance
Although buying this kind of policy has benefits, there are drawbacks as well. The expense of such policies, the potential for the policies to lapse so no benefit is ever given, and the fact that they cannot be converted into another type of policy are three of the most frequent drawbacks of purchasing a permanent life insurance policy (listed below).
The terms of permanent life insurance policies are more complicated than those of term life insurance alternatives, which makes them more difficult for customers to grasp in addition to these three drawbacks. Finally, these insurance might only offer a mediocre return on investment because of the higher premiums.
- Higher price
Permanent life insurance is more expensive than term life insurance, between five and fifteen times more expensive, according to an estimate from Investopedia. One explanation is that a portion of your premium is used to fund the cash value account. Another is that selling whole life insurance often results in higher rewards for insurance salespeople than selling term insurance.
- Reduced death benefit
When compared to term insurance, permanent life is more expensive and offers a lower death benefit. Therefore, term life insurance might be more appropriate for you if you require a lot of insurance coverage for a specific amount of time, like you might if you have a young family that depends on your income.
- Insufficient investment control
The way the cash value portion of your permanent life insurance policy is invested is decided by the insurance company. You might want to invest that money on your own if you’re a seasoned investor and comfortable taking on some more risk.
In order to avoid this, one technique advises to “purchase terms and invest the difference.” By using this strategy, you invest the price difference between comparable term and permanent life insurance policies. A variable policy, as an alternative, offers some investing alternatives, but they are restricted to the cash the insurance provider provides.
- Expensive
The fact that permanent life insurance is substantially more expensive than term life insurance is its main disadvantage. People frequently stop needing coverage after a particular amount of time. Consequently, it often makes more sense to get a term policy that can be converted in the event that you turn out to need coverage for a longer period of time.
- Potential lapse in coverage
Your insurance could be canceled if you fail to make a payment or become financially unable to continue doing so. You could need to purchase a new policy if your current one is canceled, which would be like starting over with potentially higher premiums.
- Not convertible
The durability of permanent life insurance policies has both advantages and disadvantages. This is because of the fact that you would have already paid premiums if you purchased a policy and then realized you did not require coverage. As a result, you would forfeit the full amount of money you had invested in the policy.
Do You Need a Permanent Insurance Policy?
There are a few general factors that can make a permanent life insurance policy worthwhile. Here are a few of them:
- Estate planning objectives
You can leave your loved ones a life insurance policy in order to spare them from paying substantial inheritance taxes. The majority of the time, your beneficiaries of life insurance policies are tax-free. The money from your life insurance policy can therefore be utilized to pay estate taxes while still leaving money for them to utilize after your passing.
- Leaving a legacy for your loved ones
You can leave your life insurance policy to a family member, a nonprofit, or a charitable organization if leaving a legacy is essential to you.
- Debt repayment
A permanent life insurance policy might aid in paying off debts such as a mortgage, medical expenses, or other obligations if you know that you will pass away with them. By doing this, you will avoid making your family liable for these debts.
- Keeping your business going after your passing
Buy-sell contracts that would liquidate your ownership stake in a company can be funded by permanent life insurance coverage. In order to ensure that the company survives the loss of a significant individual, such as the founder, executive, or other crucial managers, life insurance policies can also be obtained for staff.
- Taking care of your partner or dependents
Your unexpected demise could leave your family financially ruinous if they depend on your income. Consequently, a life insurance policy can assist people in meeting their financial commitments such as paying their regular payments, maintaining their mortgage or rent, and other expenses.
Tips for Insurance Planning
- In particular after you approach retirement, the insurance coverage you choose might have a long-lasting impact on your entire finances. A financial advisor might be able to help you choose insurance if you’re unsure. It needn’t be difficult to find one.
- Using the free service provided by Smart Asset, you can be matched with up to three local financial advisors who have been thoroughly vetted. You can then have no-obligation interviews with your advisor matches to choose which one is best for you. Find an advisor who can assist you in achieving your financial objectives right away if you’re prepared to do so.
- Looking for a simple way to determine how much insurance you need to purchase? You may get a fast idea of what might be best for you and your loved ones with a free insurance calculator.
Conclusion
Hopefully this article is of good help to you. We have tried to assemble all the aspects of the permanent life insurance policy. You can easily opt for the one best life insurance suitable. This article covers all the corners of the insurance policy. You can visit our official website for more such informative articles.