Life is not a straight line, so they say. It is full of ups and downs. Thus it is necessary that you take an insurance cover that can protect your entire lifespan. This is where a permanent life insurance cover comes in.
It is the type of coverage, which ensures the beneficiaries receive full benefits upon the demise of the insured. This will happen even when you die immediately after you purchase the cover.
Permanent life insurance comes with a cash component. It allows the insured to borrow or even withdraw cash from the policy after it grows to a certain level. One thing that sets it apart from the rest is that it gives the insured a chance to invest. They can choose to own a participating policy in mutual funds.
In such a case, they are entitled to dividends at the end of the year. In this article, we focus on the types of permanents life insurance.
Features of a Permanent Life Insurance
- It is easier to access cash: The cash value may be surrendered any time if an important need arises. Such a need may include paying for a child’s education. Also, if an opportunity for business arises, the funds can be accessed and utilized.
- Flexibility: The cover is thought to be the most flexible. You can stop paying the premium but the cash value will continue financing it. However, it is necessary you check the rules and regulations of the company you intend to take the cover from.
- Tax advantage: The death benefits the beneficiaries get are not taxed.
- Guaranteed coverage: If the policy does not lapse, you will be covered the entire life.
- Premiums are stable: Permanent life insurance companies are many. So, the competition is stiff and so the premiums are stable. Even though, it may be necessary to check and verify the structure before buying one.
Types of Permanent Insurance
The main types of permanent insurance include:
- Survivorship life insurance
- Whole life insurance
- Variable life insurance
- Universal life insurance
Whole Life Insurance
It is the most dominant type. It guarantees death benefits and cash value on the face amount and the premium. What matters most is that the insured should pay the premiums as agreed.
This type of insurance is expensive since it requires that you pay for the cover as well as the insurer. The payments enable the company to guarantee all the features embodied in the policy. The extra amount in the premium goes towards guaranteeing the payment.
It can be categorized as:
Ordinary: The policy will pay the beneficiaries regardless of how old the policyholder gets. The most important thing is that the premiums should be paid as agreed.
Endowment: The beneficiary receives the face value amount. This will happen even in a case where the policyholder lives beyond the specified age or dies. For instance, if it is an endowment at age 88 years, the amount will be paid whether the policyholder dies or survives. Thus, the company will undertake to pay the full value once they become 88 years old.
Limited pay: It pays the face amount once the number of years stated in the policy has been attained. For instance, if it is a thirty-year pay life insurance, the premiums must be paid up to 30 years. Once the 30-year mark has been attained, no more premium will be due. The policy is said to have matured.
Note that the guaranteed whole life permanent life insurance is considered the better option. The policy has fixed premiums and cash value that accumulates over time. When you borrow a loan against the face value but you die before paying it, the amount will be recovered from the death benefits.
Universal Life Insurance
The cover came into existence following the high-interest rate season that hit the world in the 1980s. Interest rates digit doubled almost everywhere.
So, policyholders wondered why they continued to receive low interest in whole life cover when the interest rates were high. Thus, insurers designed a universal life policy based on the short term interest. It gave policyholders a chance to enjoy high short time interest rates. They were also allowed premiums that were flexible and cheaper. The premiums were affordable compared to those paid under whole life insurance policies. But insurance companies charged a lower premium on permanent life insurance covers.
However, this was not possible in traditional whole life policies. So, when promoting the policy, the agents emphasized on the high-interest rates feature. They also stressed on the higher cash value accumulation. It made the policies to become more attractive.
Unfortunately, the policy is only attractive when the interest rates are rising. It is the reason why the policies remain underfunded in this era when the interest rates are low.
Notice that the universal policy requires that you keep an eye on the cash value. It ensures that the value remains at the levels that allow the policy to continue being in effect. If the actual value declines beyond a certain value, the policy lapses. So, to avoid this, it is necessary that it gets funded properly. If it is not funded, it may be difficult for the policyholder to catch up with the payment once it declines. If this was allowed to happen, it would make the policy to lapse.
Universal life insurance allows for flexibility in death benefits. Also, the premium payment is flexible. The policyholder may skip some payment but they must maintain a certain minimum level. Like other types of insurance, the policy has a cash value that the holder can access. You can find more details about this plan, in this post.
Variable Life Insurance
It came into existence because of similar reasons that led to the formation of universal life insurance. All of a sudden, it emerged that permanent life insurance was in a way connected to short term interest rates. So, it was unprofitable when the rates were low. Thus, the variable life insurance gave policyholders a chance to self-direct their money.
Unfortunately, the variable life insurance policy faced, and is still facing the same problem of underfunding. This is always the case especially it times when interests are low.
Thus, the policyholder must remain alert to stop the policy from relapsing. The idea is you need to pay attention to the value of the policy each year. It helps you to ensure that it is well funded. If no attention is paid especially on how it works, you will likely lose the policy.
Variable life insurance offers policyholders a chance to invest their money in an account that is managed by the insurer. The earning realized are then used to pay the premiums. Therefore, you need to monitor and ensure that the earnings are sufficient all the time. Ensure they are enough to pay the premiums.
Survivorship Life Insurance or Second To Die
The policy is a type of permanent life insurance cover which is used when planning about real estate. It can be used to pay tax upon the demise of the spouse. The policy covers both spouses and will continue running even after one of the spouses die.
When it happens, it covers the remaining spouse and the payment of the face amount continues. It is also referred to as a survivorship policy. It is an ideal policy for individuals with large real estate. They may choose the policy if they foresee a situation where the tax bill will be problematic.
Having the policy is cheaper than when each spouse takes a cover. Also, it ensures that the heirs have something when the insured dies.
Who Can Benefit from Permanent Life Insurance?
In this type of coverage, the company commits itself to pay benefits to the beneficiary. This will happen no matter how old the policyholder gets. It is a long term contract that will remain in force until you pass on. The cover is suitable for the following types of people:
- People who need an insurance cover irrespective of when they will die.
- People interested in leaving some money for their heirs.
- Anyone wanting to benefit from the investment aspect of the policy.
Notice that compared to the life insurance policy, the cost of a permanent life policy is a little bit high. But a permanent life insurance policy gives the insured a chance to decide the amount to be invested.
The Cash Value Component
As far as permanent life insurance is concerned, a fraction of the money you pay as premium is used to finance your cash-value account. The account grows according to the rate specified in the policy. If the cash value reaches a predetermined level, you become eligible to borrow money from the company.
You can also use the cash value as collateral to borrow from any other institution that accepts it. The good thing about these policy loans is that you will not go through the regular credit checks. The reason being that the insurer holds enough money, which can be used to offset the loan.
Also, it is not mandatory that you pay the loan within a stipulated time. Even though, the loan attracts some small interest. But, if the unpaid interest plus the principal amount exceeds the cash value, the policy ceases to exist. If you die before paying the loan, the balance will be recovered from the amount the beneficiaries should get.
In a case of universal insurance policy, it may be possible for you to pay the premiums using the cash value amount. This option will only be available to the universal insurance policy. But, such a policy is always risky. It is possible for the policy to relapse if the cash value diminishes to zero.
From this, it is clear that in permanent life insurance, the cash value is an important component. It offers some form of protection and it will allow you to get your cash value back if you decide to stop the cover. However, you will not be entitled to the whole amount if you have not paid the premiums for a stated number of years. In such a case, a fraction of the amount is subtracted as a surrender value.
Other Permanent Life Insurance
It includes all policies referred to as final expense insurance. These policies are lowly priced and affordable. But they are expensive when you consider the per dollar value. Also, the policies do not need a medical exam. So, you will be covered regardless of your medical exam report.
Exceptions Of Permanent Lie Insurance
Permanent life insurance will indeed give coverage for the entire lifespan. But most of the policies come with a maturity date. The date is always tied to the age of the policyholder. What happens is that if you survive the maturity date, the insurance company will pay you the sum amount. It will then terminate the coverage.
The amount paid could consist of the cover’s final benefit or some predetermined sum. Notice that whole life insurance is designed in such a way that it matures when you hit the 100 years mark. At this point, the death benefit and the cash value are always the same. In the case of universal life insurance cover, it will specify the age at which the policy matures. This has been a born of contention especially for people who survive the maturity date.
Typically, the maturity date was put at 85 years. So, if the policyholder lived beyond the maturity date, they received a little cash value after which they lost the coverage. To overcome this challenge, insurance firms adjusted the maturity age to 121 years.
How Permanent Life Insurance Compares To Term Life
- Term life insurance provides a cover for a stated fixed period, while permanent life insurance has no age limit.
- The permanent life insurance has a cash value while the term life does not have.
- Term life is less expensive compared to permanent life. Also, no one will receive benefits in the event the policyholder lives past the maturity age.
- With the term policy, you are free to include the return-of-premium rider. It means that you will be entitled to the amount of the premium if you outlive the term. The only challenge with this move is that the cost of the cover becomes expensive.
- Term insurance is a better alternative since it is cheap. Also, most people do not need lifetime coverage.
- Some of the obligations covered in the term life policy include income replacement, child’s education and mortgage. It may also cover other aspects such as students’ loans and wedding expenses.
When To Choose Permanent Life Insurance
Permanent life insurance may be better for people who have time-sensitive financial obligations. It includes real estate owners where their family is expected to pay taxes after the insured dies. Permanent coverage would help them to pay the obligation. Thus, it is a good policy that comes with a cash value that makes it ideal for lifelong coverage.
Underwriting Permanent Life Insurance
Here, you have the option to choose a policy that is fully underwritten. You will be required to produce the medical exam but pay less. Also, you may choose to pursue the no policy route which comes with limited benefits. But this route is expensive. The best thing about permanent coverage is that once you get it you will have full access to guaranteed life insurance policies.
When you die with permanent life insurance coverage, the death benefits will be paid to your heirs. Such benefits will not be subjected to income tax. But the cash value of the policy will grow tax-deferred. Also, when you decide to surrender the coverage, you will not be required to pay any tax.
However, you may be required to pay tax if the amount you expect to get is more than what you paid as premium. Also, if you chose to take a policy loan, you will not be expected to pay taxes. The only thing you need to do is to ensure that the policy remains active. Ensure that the unpaid loan plus the interest is not more than its cash value.
Cost of Permanent Life Insurance
The costs and rates of permanent life insurance are always higher. The reason is that the insurer is paid to guarantee to make payment to the beneficiaries. In most of the policies, you will be given time to choose how long you should take paying the premiums. You can choose to pay the premiums monthly or annually.
Also, you are free to choose to pay the premiums after some years until you attain the stated age. Paying more money earlier allows you to build a large cash value. The understanding is that when you pay earlier, it gives your money time to grow.
At this point you are better placed to make up your mind on the policy you should consider buying. The whole life policy is ideal for anyone wanting to avoid interest rate risk. But those who do not care about the interest rates, they may consider the variable cover. They may also choose the universal life insurance policy. Note that the turnover of agents in the industry is high. So, most people take a whole life insurance cover as a form of permanent life insurance.