What is Permanent Life Insurance?
Permanent life insurance can be an important tool to help secure your family’s financial future.
Permanent life insurance is an umbrella term for a life insurance policy that never expires. You’re covered from the time you buy a policy to the time you pass away, as long as you pay your premiums.
Permanent life insurance policies offer a death benefit, which is the money that’s paid to your loved ones when you pass away. These types of policies also include a savings account called a cash value component which is similar to an investment account. Once it’s large enough, you may be able to withdraw from or borrow against while you’re still alive.
And you might be surprised to learn that there are actually four different types of permanent life insurance to choose from. So what makes them different and which one is right for you?
Once you understand how it all works, you can make informed decisions for your family—and we’re here to help. Stay with us as we cover what you need to know about permanent life insurance, and how to choose a policy that’s right for you.
If you have a participating policy from a mutual life insurance company, a permanent policy can also pay out dividends. Mutual life insurance companies are owned by their policyholders, so if the insurer brings in more money than is spent, the profits are distributed as dividends. As a result, these dividends cashed in, used to pay premiums, or used to pay for extended coverage.
Depending on the policy, it may be possible for you to tailor your monthly payments coverage amount to fit your needs—so make sure to speak with your agent before choosing.
4 Types of Permanent Life Insurance
If you’re shopping for a permanent life policy, there are a few different types you’ll need to know about before choosing the right one for you and your family. Ultimately, your decision will depend on how much risk you’re comfortable with and how much payment flexibility you prefer.
- Whole life insurance: This type of policy is also known as “traditional” life insurance. A whole life insurance policy is paid out to your beneficiary or beneficiaries upon your death, provided that the premium payments were maintained. In addition to paying a death benefit, whole life insurance also has a savings component, in which cash value slowly accumulates. The savings component can be invested, or you can access the cash while alive, by either withdrawing or borrowing against it, when needed. Whole life insurance offers a guaranteed rate of return, which means that the cash value of a policy is guaranteed to earn a minimum amount of interest.
- Universal life insurance: The benefit of this type of policy is that it offers greater flexibility than a whole life policy. Universal life insurance allows you to adjust your premiums and increase your death benefit once you accumulate sufficient cash value in your policy. You can also combine the cash value with the death benefit to increase the payout to your beneficiaries. These types of universal life policies are more expensive than ones that don’t include the cash value with the death benefit.
- Variable life insurance: These policies allow you the opportunity to put their cash value in an investment account managed by your insurance company. The cash value varies according to the amount of premiums you pay, the policy’s fees and expenses, and the performance of a menu of investment options—typically mutual funds—offered under the policy. The benefit of a variable life insurance plan is that you get to decide how to invest the cash value. However, variable life insurance policies often come with higher fees than other cash value life insurance policies.
- Variable universal life insurance: This is what you get when you merge a variable life policy with a universal life policy. It includes a variety of investment options that may help increase the cash value of your policy. It’s important to know, however, that investment losses can also reduce the policy’s cash value and, as a result, its death benefit. Variable universal life policies also offer adjustable death benefits and premiums.
How Much Does Permanent Life Insurance Cost?
Permanent life insurance is significantly more expensive than term life insurance for a couple of reasons. First, the insurer is guaranteed to pay a death benefit to your beneficiaries so long as all premiums are paid. Second, a portion of your premium goes toward the policy’s cash value, which means you’re paying for lifelong coverage and an investment account.
In fact, a permanent life insurance policy could easily be five times the cost of a term policy (one that doesn’t offer permanent coverage). As an example, a $500,000 permanent life policy from American National costs about $4,060. However, coverage varies depending on your health, age, type of policy, and coverage amount—which is why speaking with an insurance agent is the best way to find out how much you’ll pay.
Permanent life insurance policies typically allow you to choose how long you want to pay premiums, including:
- Your entire lifetime (annually or monthly)
- Until you reach a certain age (such as 65)
- A specific number of years (such as 30 years)
- In a lump-sum payment
It’s important to weigh the pros and cons before deciding on how you want to pay your premiums. After all, if you decide to make fewer payments, you’ll face higher rates each month. On the other hand, paying more money early on will help you build a larger cash value, since the value is bigger at the start and has more time to grow with interest.
If you’re looking for a policy with flexible premiums, universal life insurance is the way to go. These policies allow you to use the cash value to make your monthly payments, which can be helpful in the event that an unexpected emergency expense comes up.
You may also decide to leave the policy’s cash value alone until it’s fairly large,and then simply skip paying premiums later in life. However, this option is only available if you’ve contributed enough into the policy that it has a significant cash value. Additionally, you must keep a close eye on the cash value, since costs can increase or the policy may not reach its projected returns. If the policy’s cash value is used up, you will lose your coverage.
Should You Buy Permanent Life Insurance?
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