Orlando Harmon
Permanent life insurance is a type of insurance policy that provides coverage for the entire life of the policyholder, as long as premiums are paid. It offers a death benefit along with a savings account. There are several types of permanent life insurance policies, each with its own unique features and benefits. The two primary types are whole life and universal life insurance. Whole life insurance offers fixed premium payments and guaranteed death benefits and cash value growth. Universal life insurance, on the other hand, provides flexible premium options and its earnings are based on market interest rates. Other types include variable universal life, which provides expanded investment options, and indexed universal life, which offers the potential for higher upside growth. Permanent life insurance policies also enjoy tax benefits, as cash value generally grows tax-free and withdrawals are often tax-exempt.
| Characteristics | Values |
|---|---|
| Type | Whole life insurance, Universal life insurance, Indexed universal life insurance, Variable universal life insurance |
| Premium payments | Fixed for the life of the policy (Whole life insurance), can be adjusted (Universal life insurance) |
| Death benefit | Guaranteed (Whole life insurance), guaranteed minimum (Universal life insurance, Indexed universal life insurance) |
| Cash value | Grows at a guaranteed rate (Whole life insurance), not guaranteed (Variable universal life insurance) |
| Flexibility | Less (Whole life insurance), more (Universal life insurance, Variable universal life insurance) |
| Investment risks | Less (Whole life insurance), more (Variable universal life insurance) |
| Tax treatment | Tax-deferred (Cash value), taxable (Withdrawals in excess of the cost basis) |
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What You'll Learn
Whole life insurance
One of the key benefits of whole life insurance is that it offers a cash value component that can grow over time. A portion of the premiums is usually put into an investment account, which can be invested in stocks, bonds, and money market mutual funds. The cash value can be accessed in an emergency, and the accrued cash value will be paid out to the beneficiary when the plan ends. Policyholders can also choose to borrow against the cash value, although any outstanding loan balance will be subtracted from the payment the beneficiary receives.
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Universal life insurance
There are two types of universal life insurance: indexed and variable. Indexed universal life insurance combines death benefit protection with a cash value component. The cash value of an IUL is tied to a stock market index, such as the S&P 500, allowing the cash value to grow based on the performance of the index, subject to a certain floor and cap. Variable universal life insurance gives policyholders the same kind of lifetime protection and payment flexibility as standard universal life with more investment options. Policyholders can invest part or all of their cash value in "subaccounts". However, this comes with more risk, including the possibility of losing part or all of the principal.
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Variable universal life insurance
The flexibility of VUL policies means that they can be adapted to suit the policyholder's budget and goals. An agent will help the policyholder find the right solution and can assist with making adjustments in the future if needed. The cash value of a VUL policy may grow over time and is accessible during the policyholder's lifetime. However, accessing the cash value will reduce the available cash surrender value and the death benefit.
VUL insurance is a good option for those who want to protect their loved ones financially while also investing their policy's cash value. Policyholders can choose from different investment options based on their goals, risk tolerance, and timeline. However, it is important to carefully assess the risks before purchasing a VUL policy, as the returns are not guaranteed year after year, and there is a chance of losing money.
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Permanent cash value insurance
It's important to note that the cash value accumulation in permanent cash value insurance policies is not uniform and can vary depending on the type of policy and the insurance company. Whole life insurance policies, for example, provide guaranteed fixed cash value accounts that grow according to a formula determined by the insurance company. Universal life insurance policies, on the other hand, accumulate cash value based on current interest rates and investments. Variable life insurance policies invest funds in subaccounts, and the cash value grows or falls based on the performance of these subaccounts, similar to mutual funds.
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Term insurance
Term life insurance is a popular choice for those looking to save money upfront. It is a form of temporary life insurance that provides coverage for a set period, typically 10, 15, or 20 years, and is generally less expensive than permanent life insurance. The cost of term life insurance is determined by factors such as age, lifestyle, medical history, and coverage goals. Basic term life insurance lengths are 10, 20, or 30 years, and the premiums remain the same throughout the policy unless you choose to change them.
There are several types of term life insurance policies to choose from:
- Fixed Term: This is the most popular type of term life insurance. It is the most basic version, with a fixed length of 10, 20, or 30 years, and static premiums.
- Increasing Term: This type of policy allows you to increase the value of your death benefit over time, but it comes with slightly higher premiums.
- Decreasing Term: This type of policy reduces premium payments over time, resulting in a smaller death benefit. It is suitable for those who anticipate fewer financial obligations as they age.
- Annual Renewable: Annual renewable term life insurance provides coverage on a yearly basis and must be renewed by the end of the policy term to continue coverage. The premiums usually increase with each renewal, making it a more expensive option.
Term life insurance offers a death benefit for a specified period, and once the term expires, the policyholder can choose to renew it, convert it to permanent coverage, or let it lapse. The policy guarantees a payout to the beneficiaries if the insured person passes away during the term. However, there is no payout if the policy expires before the insured person's death or if they outlive the policy term.
Term life insurance is a good option for those who want to provide financial protection for their loved ones for a specific period, such as covering funeral costs, everyday expenses, or replacing some of their income. It is also a popular choice for those with a specific timeline or short-term needs in mind.
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Frequently asked questions
Permanent life insurance is a type of insurance that never expires and lasts the entire life of the policyholder, as long as the premiums are paid. It offers a death benefit along with a savings account.
The two primary types of permanent life insurance are whole life and universal life. Other types include variable universal life, indexed universal life, and term life insurance.
Whole life insurance offers fixed premium payments and guaranteed death benefits and cash value growth. Universal life insurance provides more flexible premium payment options and a guaranteed minimum death benefit.
Permanent life insurance offers the benefit of lifetime protection and generally accrues cash value that can be accessed by the policyholder. It also provides tax advantages and can be used for investment purposes. However, the premiums for permanent life insurance are typically much higher than those for term coverage.
