The Basics of Permanent Life Insurance

Understanding life insurance is one of the many challenges that young adults face these days. Between all of the confusing terms and the many options, it can become quite overwhelming. While you may be tempted to ignore this and see how long you can go without getting life insurance, it may be in your best interest to get life insurance now, while your young.

Permanent life insurance is a type of insurance product that is very similar to an endowment or a whole life policy. The person insured by a permanent life policy is covered for life, and if you keep your policy payments up-to-date, your payout is guaranteed once your policy ends. Permanent life insurance also builds up cash value over time. This kind of insurance is different from term life policies, because term plans offer insurance that you can purchase for a predetermined length of time. Most of these times are for level periods, such as five, 10, 15, or 20 years. With a term policy, your insurer only awards your beneficiaries a death benefit if you die during the term of your policy.

Types

When permanent life insurance originated, companies only offered it in the form of whole life plans with fixed payments and non-flexible premiums. This guaranteed that consumers would have a pre-set cash value that would be guaranteed and a premium payment that would stay level over the years.  It was inevitable that consumers would demand greater flexibility, and as a result, universal life insurance was created.

Universal life insurance was the best solution to the rigidity of whole life insurance. It let consumers enjoy much greater flexibility by allowing premium payment amounts to be adjustable. With a universal life policy, you could also withdraw from your plan without the hefty penalties and interest that whole life plans carried with them.

Other varieties of permanent life insurance later came on the scene. For example, variable life insurance emerged as a solution for consumers who wanted to take a greater risk with their investment but also gain the potential for much higher returns. Variable permanent life insurance is the best of both worlds because it combines the perks of whole life with the flexibly of universal. You can have greater control over the money you invest in your plan when you choose this option. Additionally, permanent health insurance plans all have great tax breaks, so when you combine the tax incentives of permanent life with the possible returns of investing in a variable plan, you may see your money explode in growth over time. No matter which permanent life option you choose, if you think you are a candidate for coverage, you should seek out an independent financial advisor that can assist you with choosing from these options.

Advantages

You know that investing, risk, and liquidity are not your primary motivators for purchasing life insurance. The main reason is to protect your family with money for their living expenses if you die. The great thing about permanent life insurance is that it accomplishes this goal for your whole lifetime, and although investing is secondary, you also get the key benefit of an investment component. A permanent life insurance policy has a kind of “savings account” built right into the policy, so you have the ability to tap into or borrow against the cash value your policy has accumulated over time.

Permanent life insurance is better than term life because term insurance only covers you for a predetermined number of years. Although term life plans carry much lower premium payments, the policies build up no cash value over time. Permanent life plans are also great because the cash value that you accumulate over time is not taxed until you decide to withdraw it. You can even sidestep those taxes by taking out a loan against your policy. This is great for people who make a lot of money because they can shelter their earnings in a permanent life plan when they have maxed out all of their other investment options.

A final advantage is the one you will have as you get older. Because it lasts for life, a permanent life insurance policy could be great for the elderly, people whose estates have no liquidity. This is also great for small business owners who have all of their assets tied up in their business. This is because the death benefit of a permanent life insurance plan is oftentimes greater than what these kinds of people would be able to save on their own.

Disadvantages

One of the primary disadvantages of permanent life insurance is that it is generally more coverage than most people may need. In addition, if you have not maxed out your other investment options, then a permanent life plan might not be your best investment. The goal of permanent life is to provide growth and protection for investors, but most should really seek out those characteristics in separate plans.

Additionally, because premiums for permanent life plans tend to be very high, you may be tempted to buy less of a death benefit than you really need. For example, a permanent life insurance policy for $1 million for a 40-year-old woman in great health may cost her as much as a whopping $13,900 a year. On the other hand, that same woman could land a $1 million term policy for 20 years for about $750. That’s a massive price difference, so cost may essentially be the biggest disadvantage of permanent life insurance.

Finally, permanent health insurance plans may not be very transparent, so it may be difficult to figure out how much the policy is actually worth as an investment. Some financial experts point out that a good solution to this problem may be to buy a term policy and invest the rest of your money through other avenues. The first place to start is to ask for life insurance quotes and evaluate which option is right for you.

Have you got life insurance before?

4 Responses to The Basics of Permanent Life Insurance

  1. do single people really need life insurance?

  2. I think your case would be stronger if you used numbers for a side-by-side comparison of premiums and benefits. Which type is better under which scenarios (i.e. early death), what’s the tipping point age, etc.

  3. Hank says:

    I would rather be responsible for investing my own cash instead of letting an insurance company do it for me. I think that I can find a better rate of return myself with low cost index funds, skip taxes with a Roth IRA, etc.

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