Life insurance is intended to safeguard your loved ones financially if you die. If you’re looking for life insurance and know you’ll need it for the rest of your life, permanent life insurance gives you coverage for the rest of your life and has a cash value component.
Permanent life insurance is more expensive and more involved than term life insurance, but there are some situations where it makes sense to buy it. Here’s what you should know before deciding on a permanent life insurance policy.
What Is Permanent Life Insurance, and What Does It Cover?
Permanent life insurance policies often offer lifelong coverage as well as the potential to accumulate cash value, which grows tax-free. While you’re still living, you can access the policy’s cash value. Permanent life insurance is more expensive than term life insurance because of the length of coverage, cash value, and policy fees.
Whole life and universal life insurance are examples of permanent life insurance policies.
You can get the cash value of the account if you elect to cancel or surrender the policy at any time, although you may be subject to a surrender charge if one is applicable.
Is Permanent Life Insurance Necessary for Me?
The reason you need life insurance determines whether you need a permanent policy or a term one.
People who desire to accumulate cash value might consider permanent life insurance. It’s also preferable to term life insurance for those who wish to ensure that their loved ones receive a death benefit payment when they pass away.
People get permanent life insurance for a variety of reasons.
People financially dependent on you require lifelong life insurance coverage.
You’d like to put money into an heir’s trust.
Desire to leave a monetary legacy to heirs.
Desire to profit from a permanent insurance policy’s cash value or investment component.
Want to make sure that your loved ones have enough money to pay for their funeral and other final costs?
Term life insurance is your best option if you want the cheapest coverage. If you want to pay off your mortgage or replace your income during your peak working years, term life may be a better option.
Life Insurance Policies With Cash Value
A part of the money you spend toward a cash value account on a permanent life insurance policy goes toward premium payments. You can borrow against or withdraw the account’s cash value after it has grown sufficiently. However, if your cash value has been exhausted and there isn’t enough money in the policy to cover insurance expenses, you may need to pay additional premiums to keep the policy from slipping.
If you haven’t paid back a loan from the cash value, the loan amount and interest will be removed from your death benefit.
You may be able to walk away with some cash if you decide you no longer want permanent insurance. If you cancel the policy, you will get the cash amount less any surrender charges.
Permanent Life Insurance: What Are the Different Options?
Permanent life insurance comes in many different types, and each one has its way of building cash value and giving the policyholder options.
Life insurance is a type of insurance that covers the whole of your life.
With a whole life insurance policy, premiums, cash value rate of return, and death benefits are all guaranteed. Depending on your interest rate, the cash value component grows over time. You can withdraw money or borrow against it.
Whole life insurance is preferred by consumers above other forms of permanent coverage for various reasons. The policy’s predictability is the first.
Another benefit of a whole life policy is that you can usually earn dividends year after year. Dividends are a way for policyholders to share in a mutual insurance company’s profits. While dividends are not guaranteed, you can cash them out, use them to pay premiums, or put them into your cash-value account.
The cash value component of the policy also grows tax-free. If you surrender the policy and take the cash value, you will be subject to capital gains tax. You will not be taxed on the portion of your premium payment that you retain.
The death benefit to your beneficiaries is tax-free, as it is with any life insurance policy.
There are a few drawbacks to whole life insurance
Whole life insurance is usually the most expensive when compared to term life insurance and even other types of permanent plans.
Your cash value interest rate is likely to be lower than what you could receive if you invested your money differently.
Whole life insurance policies lack the flexibility that universal life insurance policies provide. You can’t change the premium installments or the death benefit on a full life insurance policy.
Life insurance that covers the whole family
Whole life insurance policies are less flexible than universal life insurance (UL). Within certain restrictions, you might be able to change your premium
Payments and Death benefit.
The cash value gains in a universal life insurance policy depend on the type of UL policy you buy:
Guaranteed universal life insurance has a minimum rate of return on cash value.
Indexed universal life insurance relates your cash value to the success of an index like the S & P 500.
Variable universal life insurance relates your cash value to investing subaccounts that you control. It comes with a higher risk, but it also comes with a higher potential gain if your assets perform well.
The amount of investment risk you want and how much you want to handle subaccounts will determine the universal life insurance policy you choose.
Universal life insurance is less expensive than whole life insurance, but it is still more costly than term life insurance.
Furthermore, the cost of universal life insurance may not be fixed. You pay a premium that is shared between the cash-value account, the cost of insuring you, and policy changes. However, as you get older, many policy expenses rise. If your cash value has been depleted, you may be forced to pay higher premiums to cover the costs and keep your policy active.
Life insurance with variable premiums
Variable life insurance has a cash value component that you can invest in equities, bonds, or money market funds. The amount of gain or loss in your cash value is determined by the investments you choose.
Variable life insurance is for people who are willing to take on greater investment risk. You may be able to earn a higher return than with whole life insurance, but you’re also taking on more risk.
You might use the earnings to cover some of your policy premiums if your cash value increases.
Furthermore, the fees and expenses associated with a variable life insurance policy can considerably diminish the number of your monthly payments that go toward the cash value. Variable life insurance contracts have fees for death and expenses, as well as fees for administration and investment management.
If you’re thinking about buying variable life insurance, be sure you know which portions of the policy are guaranteed (such as cash value) and which aren’t.
Insurance for burial and ultimate costs
Burial insurance, commonly referred to as burial insurance or final expense insurance, is a small whole life insurance policy with a death payout of $5,000 to $25,000. These insurance policies are usually sold without a medical examination, and you cannot be denied coverage. People who have health problems or don’t have a lot of money are more likely to buy this kind of permanent life insurance to pay for their burial or funeral costs.
Burial insurance, also known as final expense insurance, is intended to assist your beneficiaries in covering funeral costs and other miscellaneous expenses after you pass away. It is expensive due to the amount of coverage it provides.
The purpose of burial insurance is not to help your family pay for things like college tuition, a mortgage, or day-to-day living costs.
Life insurance for survivorship
Survivorship life insurance is also known as “joint life insurance” or “second-to-die life insurance,” which raises some eyebrows. A whole life insurance policy is usually the case. It is unique among permanent life insurance policies in that it covers two people—usually a married couple. The policy pays out the death benefit to the beneficiaries after both spouses have passed away.
Most of the time, survivorship life insurance is used to fund a trust so that the beneficiaries can pay estate taxes and other costs associated with closing the estate.
Survivorship life insurance is typically less expensive than purchasing two separate policies on the same individual. This is particularly true if one of the insured individuals has a medical condition.
A survivorship policy is also less difficult to qualify for than a single-person policy. Insurers are less concerned if one applicant is less insurable due to health issues because both policyholders must pass away before the policy pays the death benefit.
However, if both spouses rely on each other financially, this type of policy will not work. You may also want to cancel the policy if you and your spouse decide to divorce. If you’re concerned about this, some insurers will give you the “right to split” the policy into two separate policies.
Life Insurance Premiums for the Long Run
Life Insurance (Term vs. Permanent)
There are two big differences between term life insurance and the types of permanent life insurance we’ve already talked about:
Term life insurance has a fixed term of 10, 15, 20, or 30 years with level premiums.
You can renew the policy every year after the level term period is over, but at a higher cost. It could become prohibitively expensive.
Term life insurance does not accumulate cash value over time.
Nonetheless, for many families, term life insurance is an excellent option. Because life insurance needs are usually limited, you can match the term length to your requirements. For example, a 35-year-old woman may decide to buy term life insurance for $80,000 per year for the next 30 years.
Term life insurance is the most cost-effective form of life insurance, allowing you to get the most bang for your buck.
If you need permanent coverage later, many term life policies include a term life conversion option. When you convert, your life insurer will inform you of your policy options. Your rate will be determined by your original health class and the age at which you convert. A new life insurance medical examination is not required.
Remember that no one-size-fits-all solution exists when weighing your options. A financial advisor can help you figure out how life insurance fits into your overall financial plan, and a life insurance agent can help you find the best rates.