Permanent life insurance provides coverage for the full lifetime of the insured person. While permanent life insurance is more expensive than term insurance, it combines a death benefit with a savings component that earns interest on a tax-deferred basis.
Types of Permanent Life Insurance
The two primary types of permanent life insurance are whole life and universal life insurance. The cash value of whole life insurance grows at a guaranteed rate. Universal life insurance also includes both a savings element and a death benefit, featuring more flexible premium options and earnings based on market interest rates. Variable life and variable universal life offer even more options for investing the cash value in mutual funds and other financial instruments.
Once you’ve decided on the policy that’s right for you, it’s important to thoroughly research the firms you’re considering to ensure you secure the best life insurance available.
Key Takeaways
- Permanent life insurance provides coverage for the policyholder’s entire lifetime.
- Most permanent life insurance policies merge a death benefit with a savings component.
- Whole life and universal life insurance are the two main types of permanent life insurance.
- Life insurance policies receive favorable tax treatment.
- Permanent life insurance policies come with significantly higher premiums compared to term life insurance.
Exploring Permanent Life Insurance: A Thorough Understanding 🌟
While term life insurance covers you for a certain number of years, permanent life insurance lasts throughout your lifespan, as long you continue to pay the premiums.
Premiums for permanent life insurance not only cover the cost of the policy’s death benefit but also contribute to building cash value. Policy owners can borrow against this cash value through a policy loan or withdraw funds outright to meet financial needs like medical expenses or educational costs. Interest is charged by the insurer on any outstanding cash value loan. If unpaid interest and the loan balance surpass the policy’s cash value, the coverage will lapse.
These policies also boast favorable tax treatment. The cash value typically grows tax-deferred, meaning no taxes on earnings as long as the money stays within the policy. Some funds can even be withdrawn without taxation, often up to the total amount of the paid premiums. Remember, taking cash value out via withdrawal or loan can reduce the future death benefit for heirs.
Additionally, many term life policies offer a conversion option to transfer to permanent life insurance before the term concludes.
Comparing Permanent Life Insurance to Term Life Insurance 🚀
Insurance needs vary throughout different life stages. Both whole life and permanent life insurance provide a death benefit as long as the premiums remain current. Term life insurance, popular for its lower premiums, typically expires before the end of one’s life, necessitating a potentially expensive renewal.
Term insurance is often utilized by younger families to provide interim coverage until significant debts are paid or sufficient savings are accumulated. Others might prefer the lifelong coverage and savings opportunities a permanent policy offers.
As a result, many term life policies include an option to convert to permanent life insurance, usually without requiring new medical exams or qualifications, which can be particularly beneficial for those with medical issues that increase the cost of new policies.
While the premiums for permanent life insurance are higher, those who choose these policies typically have the financial means to afford them. Moreover, with added savings opportunities, permanent life insurance can serve as a tax-efficient investment vehicle, offer security for lifelong dependents, or assist in estate planning.
Pros and Cons of Permanent Life Insurance 🎯
Every decision has its advantages and disadvantages. Permanent life insurance, though more expensive, ensures your beneficiaries receive a death benefit without term constraints. It also allows for the accumulation of savings with tax benefits. You can withdraw or borrow these funds during the policyholder’s lifetime.
However, the downsides include high premium costs, the risk of not maintaining payments, and the potential reduction of the death benefit if the cash value is utilized.
Permanent Life Insurance Overview 📘
What Is Permanent Policy Life Insurance?
Permanent life insurance is a life insurance policy that remains active until the policyholder’s death, often featuring a cash value savings component.
What Are the Four Types of Permanent Life Insurance?
The four types of permanent life insurance are: whole life, universal life, variable universal life, and variable life.
What Is Better, Term or Permanent Life Insurance?
Both types of insurance have unique benefits and suitable situations. Determine which to choose based on what premiums you can afford. Permanent life insurance offers longevity and a savings component, but term life insurance typically has lower premiums.
Can You Cash Out Permanent Life Insurance?
Yes, after being in force for several years, permanent life insurance can be cashed out by taking out a loan against the policy, withdrawing cash, or surrendering the policy. Note that surrendering may incur fees and taxes.
How Long Does Permanent Life Insurance Last?
Provided premiums are paid timely and the policy is not surrendered, a permanent life insurance policy lasts the policyholder’s lifetime.
The Bottom Line ✨
Permanent life insurance promises a guaranteed death benefit upon the policyholder’s death, with a savings component that grows tax-free while the insurance is active. It also allows policyholders to access funds via withdrawal or loan during their lifetime. Despite the higher premiums, permanent life insurance provides valuable lifetime coverage and savings opportunities.
Related Terms: Term Life Insurance, Variable Life Insurance, Policy Loan, Estate Planning.
References
- Insurance Information Institute. “What Are the Principal Types of Life Insurance?”
- Northwest Mutual. “What to Know About Borrowing Against Life Insurance With a Life Insurance Loan”.
- John Hancock Insurance. “Income Taxation of Life Insurance”. Page 7.
- Wharton School of the University of Pennsylvania. “Laspe-Based Insurance”, Page 1.
- New York Life. “5 Reasons to Consider Life Insurance”.
