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Picking a permanent life insurance policy

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Life insurance lingo can be complicated and hard to understand, but knowing the difference between term life insurance vs. permanent life insurance is a good start. There’s a big difference between the two — term life insurance only covers you for a certain amount of time. The money you paid in premiums is gone once the term policy expires. 

In contrast, permanent life insurance is permanent. You’ll be covered so long as you pay your premiums, without having to worry about an expiration date on your policy. The permanent life insurance cost may be higher but is justifiable once you understand what you’re paying for (and why).

Take a deep dive into how a permanent life insurance policy works and what all the terminology means so you can confidently answer the question “what is permanent life insurance?”

Permanent life insurance definition

Permanent life insurance is a type of insurance that doesn’t expire and will provide a payout (called a death benefit) after you pass away to the person (or people) you choose. When comparing term vs. permanent life insurance, the key to how they work is in their names. Term life insurance is only available for a set period of time, or term. Permanent life insurance continues on as long as you keep the policy current.

If you’re wondering why a permanent life insurance policy would be important, imagine you’re 30 years old and have term life insurance with a length of 20 years. Your term insurance expires when you’re 50. If you pass away at 51, your loved ones do not receive any money. With permanent life insurance, your loved ones will receive a death benefit if you die at any point you were paying for life insurance coverage.

Other important life insurance terms

Besides term vs. permanent life insurance, there are a few other terms you should know:

  • BeneficiaryThe person(s) who receive the policy’s death benefit
  • Cash value account – Part of your permanent life insurance policy, a portion of your premium grows in a cash-value savings account available for your use
  • Death benefit – The payout your loved ones receive once you’re gone
  • Owner – The person who controls the policy
  • Purchase options – Add-ons allowing the insured to purchase additional coverage
  • Waiver of premium – Suspends premiums in case of total disability

Permanent life insurance pros and cons

Permanent life insurance probably sounds ideal right about now. After all, it’s hard to time your death, so why would anyone want to buy term life insurance that expires after a certain amount of time? Cost is the main reason — a term life insurance policy is usually cheaper than permanent life insurance. 

Cost aside, a permanent insurance policy may be a better use of the money you pay in premiums. That’s because the policy won’t expire as long as you continue to pay. Additionally, part of the premiums grow in a cash value account you can access while you’re alive. 

Compare and contrast permanent life insurance pros and cons:

ProsCons
No expiration dateMore expensive than term life insurance
Premiums go towards a death benefit for your beneficiaries and a cash value account you can borrow fromBorrowing from the cash value account accrues interest until you repay it
Tax-deferred growthNot paying back your cash-value account will lower the death benefit amount
If you become sick, you can get accelerated benefits from the payout amount to pay for medical treatment and expensesThe accelerated benefit amount you took while ill will be deducted from your death benefit payout

Types of permanent life insurance

There are three main types of permanent life insurance: whole life, universal life, and variable life. When you begin to compare permanent life insurance offerings, you’ll find three main components present in each policy type.

  • Mortality Costs – The policy’s premiums to be paid, determined by the face amount of the policy and estimate of when the policyholder will die.
  • Expense Charges – Fees that help fund the insurance company and commissions
  • Cash Value – The amount of income life insurance policies generate or have generated

Variable Life

Variable life insurance is the riskiest investment of the types of permanent life insurance. Your premium is invested in options of your choice, and death benefits and cash value depend on the performance of investments made. Since those reasons present more of a gamble, if you’re interested in securing death benefits for loved ones, a variable policy may not be the best permanent life insurance choice for you.

Variable products are one life insurance option demonstrating how essential it is to learn how your choices will affect you long term. If you like to be in control and have ruled out variable life insurance, only two policies are left in the ring — universal and whole life insurance. Both types provide life insurance, but because of the available components of each, you have to set expectations for life insurance policies to accurately compare.

Whole Life Insurance 

If you prefer a fixed monthly rate, standard expense charges, and a guaranteed rate of return on your investment, whole life insurance is going to be the best permanent life insurance policy for you. Generally, that’s because the insurer assumes all risk.

However, even though whole life sounds like a safer route because rates are guaranteed, very little of your premium is invested (reducing the “gambling aspect” which can also mean losing out) and you cannot contribute more.

Why would you want to contribute more? Because bigger investments mean bigger dividend payments. You can use dividend income to pay any premiums, buy extra insurance, or re-invest.

You should be aware that your investment would only grow at a guaranteed rate of return, so regardless of market performance, you’re locked into a growth percentage. This can be good or bad. If you’re looking for a set premium because of a strict budget or don’t trust yourself to invest wisely though, since you can control investments with variable and universal life meaning you should know what you’re doing when investing, whole life may be your best permanent life insurance option.

What to look for when buying whole life insurance policies

If you’ve decided on whole life insurance, you’re likely craving the guarantees whole life products offer, so make sure they’re worth your while. Compare premiums of different companies with offered amounts of insurance as well as potential dividends. Similar to seeking a universal policy, you want low mortality costs, low expense charges, and a reasonable rate of return on investments.

However, this is especially true for whole life as you will not be able to change the rates. Examine policy time limits and any other restrictions placed on the policy. Additionally, review how premium amounts paid will contribute to the policy’s current cash value, and ensure the company has a strong, good credit standing.

Universal Life

If you need life insurance and a strong investment tool, universal life beats whole life insurance. If you want more flexibility and control over your policy, consider universal life insurance. Your mortality costs (aka premiums) can vary based on insurer or changes you make, and there’s a cap on the maximum premium limit. As for cash value, it reflects market activity but will still have a minimum rate of gain.

Universal premiums won’t fluctuate at an unreasonable rate — you’ll pay a set amount for a certain time period (not indefinitely though) and the beauty is that you can contribute more or less to the policy’s investment aspects at any time.

The other beauty is that you can choose how it’s invested. If you’re a savvy spender, your premium can be paid with the dividends earned from your investment, so your out-of-pocket cost can eventually disappear. At that point, you have tax-free growth happening with minimal effort. The 4th rule of ecology is that there’s no such thing as a free lunch. The 5th rule those scientists forgot to add is that “tax-free” is a rarity too.

What to look for when buying universal life insurance

If you decide on a universal life insurance policy, focus on the three main components: mortality costs, expense charges, and cash value.

With universal life insurance policies, focus on options offering flexibility. Ideally, you want low mortality costs combined with low expense charges and a high yield on cash value. Ask how taxes will affect any account transactions, if minimum premium limits can be suspended, and average investment returns.

As always, read the fine print. After the work you’ve done so far, that won’t be as bad as it sounds. Additionally, check the company’s rating at non-partisan resources like Moody’s or AM Best.

Variable life insuranceWhole life insuranceUniversal life insurance
Cash value funds can be invested in mutual funds or other investmentsCash value earns a minimal, fixed amount of interestCash value earns a minimal, fixed amount of interest
Minimum premium payment required, although you can pay more towards your cash value portionFixed premiumsMore flexible premium-payment options
Guaranteed minimum death benefitGuaranteed death benefitDeath benefit amount can be adjusted

The takeaway

  • When comparing term vs. permanent life insurance, the permanent life insurance cost is higher than you’d pay for term life insurance.
  • A permanent life insurance policy doesn’t expire.
  • There are three types of permanent life insurance: whole, variable and universal.
  • Whole life insurance is the safest and most straightforward of the three types, with fixed premiums, a guaranteed death benefit and fixed earnings on your cash value amount.
  • Variable life insurance allows you to invest the cash value portion for higher returns, but as with all investments, comes with risk.

Some people may ask “Why is permanent life insurance bad?” More than anything, it’s misunderstood. When it comes to choosing the right permanent life insurance policy, it’s a personal decision. There’s not one general rule as to what life insurance product you should or shouldn’t buy. As long as you understand what you’re investing your hard-earned money in, you’ll be golden.

Cynthia Paez Bowman

Writer

Cynthia splits her time between Los Angeles, CA and San Sebastian, Spain. She travels to Africa and the Middle East regularly to consult with women’s NGOs about small business development.

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