There are two major types of life insurance term and whole life. A couple of weeks ago I discussed Term Life Insurance. In this article, I will be giving a basic overview of whole life, also called permanent life insurance.
Permanent life insurance is insurance coverage designed to last for your entire life.
What are the aspects of permanent life insurance?
Permanent Coverage – Permanent life insurance can provide a lifetime of coverage at a level premium which means you’ll pay the same premium for the life of the policy.
Cash Value – Permanent policies have an “investment” feature that may generate cash value that can grow over the life of the policy. This means that the policyholder may be able to borrow against the policy or even cancel it for part or all the cash value if they feel they no longer need the insurance.
What are the different types of permanent life insurance?
The two main types of permanent life insurance are Whole Life and Universal Life.
Whole Life Insurance – Whole life insurance provides a lifetime of coverage at a set premium, meaning your premium is guaranteed for the life of the policy. Though the policy develops a cash value that you can borrow against, doing so causes a reduction in the death benefit.
Universal Life Insurance – Like whole life insurance, universal life insurance provides a lifetime of coverage. Because a universal life policy offers a flexible premium and face amount, it can be less expensive than a whole life policy. Universal life insurance does develop a cash value, but the value is not guaranteed. Since universal life insurance has more variables than whole life insurance, be sure to thoroughly research how this type of coverage works before deciding to buy a policy.
How does permanent life insurance compare to term life insurance?
Higher Premiums – Because permanent policies provide a lifetime of coverage and generate cash value, the premiums are much higher than they would be for term life insurance. Premiums for a permanent policy can cost 7-10 times the cost of a 20-year term life policy. (premiums will vary for each person, depending on age and health). It’s more expensive than term insurance because the company knows that sooner or later they will have to pay the face value of the policy. They hope to earn enough on the investment of your money to be able to pay the claim and still make a profit.
It’s More Complicated – The relationships between premiums, cash values, interest rates, and other aspects of a permanent policy are not always obvious to the buyer. If not explained properly, this can cause confusion or unpleasant surprises once the policy is in place. Given the flexibility (especially with universal life) involved in putting together a permanent policy that meets your goals, the purchasing process involves more research, planning and professional assistance.
Risk – Depending on the type of permanent insurance policy you choose and the performance of that policy, you may need to reduce your death benefit, pay higher premiums in the future, or watch your cash value decrease over the life of the policy.
Hopefully this helps you gain more of an understanding of permanent life insurance.