What is Permanent Life Insurance?
Permanent life insurance is a form of life insurance that covers you for life and offers your family protection from financial hardship. Additionally, a permanent life insurance policy has a cash value accumulation feature that grows steadily over time.
In some cases, you can borrow or withdraw a portion of the cash value and use those funds for living expenses or to pay your premiums. Permanent life insurance policies also offer a number of tax advantages.
To get detailed information about the various forms of permanent life insurance, contact an independent agent in our network today. A local member agent can provide sound advice, affordable permanent life insurance quotes and help you find the right coverage for your family.
What Does Permanent Life Insurance Cover?
There are several different types of permanent life insurance policies which include:
Note that the specifics of these policies vary from one company to another. The three primary types of permanent life insurance are described in more detail below.
Whole Life Insurance
A whole life policy remains in effect for a person’s lifetime. Depending on the whole life insurance policy you buy, you will have several premium options, including:
- Paying your premiums monthly for the life of the policy
- Paying your premium in one lump sum payment when you buy the policy
- Paying your premiums for a set number of years
A whole life insurance policy consists of both a death benefit and a cash value accumulation component. The cash value grows regardless of whether the insurance company performs well on its investments.
You can use the cash value, or savings portion, as collateral; you can withdraw or borrowed against it, and you also have the option of buying the policy at a ”surrender value,” which means you can cancel the policy for a single cash payment.
Universal Life Insurance
Universal life insurance is very similar to a whole life policy, except that it has additional flexibility. A universal life insurance policy has the following features:
- A death benefit where you have two options:
- Maintain the same death benefit from year to year
- Set the death benefit equal to the original amount plus the cash value accumulation
- Allows you to decide how much of your premium will go towards insurance, and how much will go into the savings portion
- Allows you to earn higher interest on your cash value accumulation when inflation rates are high, and minimum guaranteed interest rates when inflation rates are lower
Variable Life Insurance
Variable life insurance is a lifetime policy with these features:
- Guaranteed minimum death benefit.
- Allows you to select which performance portfolio you want to invest your money in, such as opting to invest the savings portion of the premium into either stocks, bonds or a money market fund. However, the performance of this cash saving feature is dependent on how well the investment performs.
How Does Permanent Life Insurance Work?
The way permanent life insurance works is determined by the premium you pay. The premium is allocated by the life insurance company in three ways:
- A portion of the premium is used for cost of the life insurance or the death benefits.
- A portion of the premium goes towards the administrative cost for managing your policy.
- The final portion of the premium goes towards the savings or cash value accumulation portion of your policy.
The premium you pay can remain the same and is guaranteed for the life of the insurance policy, or can be more flexible.
The cash value increases because of the regular payment of your premium and also because of interest or investment earnings.
How Much Does Permanent Life Insurance Cost?
Your permanent life insurance cost will depend upon the following considerations:
- The amount of the death benefit you choose
- Your age
- The state of your health
Permanent life insurance premiums are less expensive to buy when you are younger and become increasingly more expensive as you age. The life insurance company determines how much your permanent life insurance premium will cost.
Premiums can be “locked in” and will remain the same for the life of the policy, such as in a whole life policy. They can also be something you can alter, as in a universal life insurance policy.
To determine how much permanent life insurance you need, you can use this formula:
Death benefits required + income replacement required – investments and retirement savings = life insurance needs.
Let’s look at the elements of this formula in depth:
Determine the death benefits needed: Add up your anticipated financial requirements at the time of your passing, such as end of life and funeral expenses, your mortgage and outstanding debts, college tuition for your children, and other benefits you may want.
Choose the amount of income to replace: Determine how much replacement income your family will need if you die unexpectedly. Consider how you make per month, or how much of your existing salary your survivors will need per month and multiply by 12 for a yearly projection.
Assess financial assets available: Finally, deduct your existing assets from the above two components. Your financial assets would include any life insurance plans already in place, your retirement plans, and other savings or investments.
Is Permanent Life Insurance Taxable?
Permanent life insurance is not taxable until you withdraw funds from the cash portion of the policy. If you take out a “loan” against the policy, the amount you borrow is not taxable. Death benefits paid out to your named beneficiary are exempt from both income tax and estate taxes.
How to Buy Permanent Life Insurance
Knowing how to buy permanent life insurance is very important. Your first step is to determine how much permanent life insurance you need. Since there are many variations of permanent insurance available, it is equally vital that you carefully shop around.
Consider the options and format of the policy you choose, as the costs as can vary considerably from one life insurance company to another.
Your best approach is to work with an independent agent in the Trusted Choice network who can do the comparison shopping for you and help you buy the right permanent life insurance policy for your needs at the best rates.
When to Get Permanent Life Insurance
There are a number of reasons why a person might choose to get permanent life insurance. Because permanent life insurance is a lifelong life insurance policy, a good time to purchase life insurance is when you are doing your financial planning, and when you are considering ways to create financial security in your retirement years.
You may also choose permanent life insurance when you are looking for a long term savings and investment tool.
A very good time to purchase permanent life insurance is when you are young and your rates are extremely low. If you’re older, especially if you are in your fifties or over age 65 you can still buy a permanent policy as an estate planning vehicle or to set up a trust.
Is Permanent Life Insurance an Asset?
People who are evaluating life insurance policies often ask, “Is permanent life insurance a good investment?” The answer depends on an individual's needs and goals. Some people prefer to invest in term life insurance and invest the difference they would have paid into a permanent life insurance policy in other ways.
Others like the fact that permanent life insurance is designed to be an asset that grows in value.
You can use whole life or universal life insurance as a long term investment vehicle that provides continuous, stable growth along with tax advantages and a death benefit. A permanent life insurance policy provides liquidity, as you can borrow against it or withdraw funds.
Why Is Permanent Life Insurance Important?
Permanent life insurance is important because it allows you to set money aside for your golden years, and can provide for those who will follow in your footsteps.
Many people choose lower cost term life insurance, promising themselves they will save and invest the money they would otherwise have spent buying a whole life or universal life insurance policy.
The potential downside, is that you may not actively invest money or actively manage those investments. And even if you do set money aside and invest it, you’re not guaranteed a profit due to market volatility.
The other feature of permanent life insurance that many people like is that unlike term life, it pays a death benefit no matter what.
By contrast, term policies often lapse without the insurance company paying out a claim, and when you go to renew your term insurance, it can be significantly more expensive to renew, especially if you have health concerns.
Permanent insurance builds up a cash value over time and continues to achieve steady growth over the life span of the policy. You can also borrow the funds or take a loan out against the cash accumulation portion, although this can reduce the amount of death benefits payable from the policy.
Permanent life insurance is a significant and long term investment in your future. An independent agent in the Trusted Choice network can provide you with a wide variety of permanent life insurance options and can find you the most affordable rates for your budget.
Get your future secure and protect your loved ones by contacting an independent agent in our network and find the right life insurance policy for your needs.