We all like to hope our loved ones won't experience financial hardship as a result of our deaths. Permanent life insurance is designed to keep that from happening.
"Life insurance is a component of a sound financial plan," says Tony Steuer, an insurance literacy advocate and creator of the Insurance Quality Mark, a system designed to help consumers find qualified insurance agents.
When you purchase a life insurance policy, you agree to pay premiums in exchange for a lump-sum amount of money that will be disbursed after you die. While you won't be around to reap the financial rewards, the money will go to your beneficiaries -- those persons or entities you designate to receive it.
Determining your need
In general, life insurance comes into play when someone is financially dependent on you, whether it is a spouse, child, elderly parent or even a business.
Some people choose to buy term life insurance, which only covers you for a set period of time, such as 20 years. Permanent life insurance, on the other hand, will cover you for your entire life as long as you pay your premiums. Since term life covers a shorter period of time, it is significantly less expensive.
You may choose a term life insurance policy if you only need coverage temporarily, such as until your children graduate from college and are able to take care of themselves. However, if someone will be dependent on your income for the rest of his or her life, a permanent life insurance policy may be a good choice, Steuer says. For example, if you have a special-needs child who will always need your financial support, a permanent life insurance policy could ensure the child's care.
The amount your policy will pay out when you die is called the face amount. A portion of your premiums also goes toward a cash value account, which grows tax-deferred either in an interest-bearing account or an investment account. If you cancel the policy early or stop paying your premiums, you can get any money that has accumulated in the cash value account, though you aren't eligible to receive the face amount.
Young, healthy people are likely to pay less for permanent life insurance than older people. For example, a nonsmoking man at a healthy weight who took out a permanent life insurance policy at age 35 might expect to consistently pay $368 per month for a $500,000 permanent life insurance policy, while a nonsmoking man at a healthy weight who took out a policy at age 50 might pay a consistent $707 per month, according to Trusted Choice, an affiliation of independent insurance agents. That same 50-year-old healthy, nonsmoking man might pay $111.38 per month for a term life insurance policy taken out that year, Trusted Choice says.
You also may pay more for life insurance if you live a riskier lifestyle, such as if you are a sky diving instructor.
Making sense of the options
All permanent life insurance is not the same.
- Whole life insurance policies provide a guaranteed death benefit for a set premium. You'll always pay the same premium amount, and you know from day one how much money your beneficiaries will receive when you die.
- Variable life insurance policies invest the money you pay in premiums. As a result, the amount of your death benefit can vary based on the performance of the investment.
- Universal life insurance policies give you flexibility over how much the payments are and the amount of the death benefit. You get to adjust the amount you pay, but that will impact the death benefit.
- Variable universal life insurance policies also allow you to have flexible premiums. As with variable life insurance policies, the money is invested, meaning your death benefit can vary based on the investment performance.