Key Highlights

• Permanent life insurance provides lifelong coverage and never expires
• There are different types of permanent life insurance policies, including whole life, with variations, participating whole life, and universal life with variations.
• Permanent life insurance policies have a cash component that can grow over time
• The cost of permanent life insurance is generally higher than term life insurance
• Permanent life insurance provides additional benefits and financial security
• When purchasing permanent life insurance, it’s important to assess your insurance needs, policy costs, and the financial stability of the carrier.

Introduction

When it comes to life insurance, there are two main options to consider: term life insurance and permanent life insurance. While term life insurance provides coverage for a specific period, typically 10, 20, or 30 years, permanent life insurance offers lifelong coverage that never expires. Permanent life insurance policies also have a cash value component that can grow over time, providing additional benefits and financial security. In this beginner’s guide, we will explore the basics of permanent life insurance, the different types of policies available, and how to get started with purchasing permanent life insurance if that is what is best for you!

Understanding Life Insurance: The Basics

Life insurance provides financial protection for loved ones in the event of the policyholder’s death. It ensures that beneficiaries receive a predetermined sum – the death benefit. Permanent life insurance is a lifelong coverage that never expires, in contrast to term life insurance, which covers a specific period. Permanent policies also accumulate cash value over time, acting as a savings component. Understanding the key differences between whole life with variations, universal life with variations, and participating whole life can help individuals make informed decisions. It’s essential to assess your needs and consider factors like premiums, coverage length, and cash value growth when choosing a policy.

What is Life Insurance?

Life insurance is a contract between an individual (the policy owner) and an insurance company (the insurer). The policy owner pays premiums to the insurer in exchange for a death benefit, which is the amount of money that will be paid out to the policy’s beneficiaries upon the death of the insured individual. The purpose of life insurance is to provide financial security and peace of mind to the policy owner’s loved ones in the event of their death. There are different types of life insurance policies, including term life insurance and permanent life insurance.

The Purpose of Life Insurance

Life insurance serves the purpose of replacing lost income for the policy owner’s loved ones in the event of their death. With life insurance, the policy owner’s beneficiaries will receive a death benefit, which can be used to cover expenses such as funeral costs, outstanding debts, mortgage payments, and other financial obligations. After someone retires, if they pass away, life insurance will serve almost like a pension, that replaces the social security that stops when they die. Therefore, after someone retires, the need for life insurance is much lower. However, permanent life insurance can be a great tool for state planning purposes and to avoid taxes, but that is a rare scenario. Life insurance provides peace of mind, knowing that even in the policy owner’s absence, their loved ones will be taken care of financially. It can also be used as a tool for estate planning, providing a way to leave an inheritance or support charitable causes, and finally, replacing the lost income of your loved one. By having a life insurance policy in place, individuals can have confidence that their loved ones will have the financial resources they need to maintain their standard of living and achieve their future goals.

What Life Insurance Policy Never Expires?

Permanent life insurance is a type of life insurance policy that provides lifelong coverage. Unlike term life insurance, which only covers you for a specific period, permanent life insurance remains in effect as long as you pay the premiums. Permanent life insurance policies also have a cash value component, which can grow over time and provide additional benefits. Some of the key features of permanent life insurance include lifelong coverage, a cash value component, and the ability to access the cash value for various purposes.

Defining Permanent Life Insurance

Permanent life insurance is a type of life insurance policy that provides lifelong coverage. As long as the policy owner pays the guaranteed rates and premiums (as opposed to current rates), the policy remains in effect for the rest of your life and does not expire or require renewal. Permanent life insurance policies also have a cash value component, which can accumulate over time and provide additional benefits. The cash value component of a permanent life insurance policy can be borrowed through a policy loan, where you take a loan out against the cash value that can be used for whatever purpose you want for the rest of your life, such as supplementing retirement income, paying for educational expenses, or covering emergency expenses.

Key Features of Permanent Life Insurance

• Cash value component: Permanent life insurance policies have a cash value component that can grow over time. The cash value accumulates tax-deferred and can be accessed for various purposes.
• Guaranteed death benefit: Permanent life insurance policies provide a guaranteed death benefit, which is the amount of money that will be paid out to the beneficiaries upon the death of the insured individual.
• Premium payments: Premiums for permanent life insurance policies are generally higher compared to term life insurance. However, the premiums for permanent life insurance remain level throughout the life of the policy.
• Potential for dividends: Some permanent life insurance policies, particularly whole life policies, may pay dividends to policyholders. Dividends are not guaranteed and depend on the performance of the insurance company.

Types of Permanent Life Insurance Explained

There are different types of permanent life insurance policies available, each with its features and benefits. The main types of permanent life insurance include whole life insurance, universal life insurance, variable life insurance, and indexed universal life insurance. These policies differ in terms of their premium structure, cash value growth potential, and flexibility. Understanding the different types of permanent life insurance can help individuals choose the policy that aligns with their financial goals and needs.

Whole Life Insurance

Whole life insurance, also known as ordinary life insurance, is the most basic option among permanent life insurance policies. This policy guarantees the death benefit amount and the rate at which the cash value accumulates. The cash value of a whole-life policy does not affect the policy’s death benefit, and the death benefit will remain constant for the entire life of the policy. The only exception is if the policyholder withdraws a portion of the cash value or takes out a loan against it. In such cases, the death benefit may be reduced unless the policyholder repays the full amount, plus any interest, before their death. Whole life insurance policies have a cash value component that can function as tax-deferred savings or investment accounts. This means that the cash value grows over time and can be accessed by the policyholder during their lifetime. However, upon the policyholder’s death, the cash value component reverts back to the life insurance company and is not paid out to the beneficiaries.

Universal Life Insurance

Universal life insurance, also known as adjustable life insurance, offers more flexibility than a whole life policy. The policyholder can adjust the premium and death benefit with this policy, though limits and requirements will apply. For instance, increasing the death benefit may require a medical exam, and decreasing the premium payments may be possible once the cash value has reached a certain threshold. Universal life generally guarantees a minimum interest rate, but they are not insulated from market conditions whole life policies are. As a result, the growth rate and projected value may fluctuate. Therefore, the guaranteed premium charge is probably different than the current premium charge. Universal life insurance is offered in several varieties to suit financial situations.

Variable Life Insurance

Variable life offers you more control over the policy’s cash value. The policyholder can choose which stocks, bonds, and money market mutual funds to invest in, without the need for a credit check. If those investments perform well, the cash value could grow faster than it would in a whole or universal life policy. Plus, that cash value can be part of the death benefit. However, because the policyholder makes the investment decisions, they also assume all the risk. If their investments perform poorly, the cash value can decrease. The death benefit could be negatively affected too, though some policies guarantee a minimum payout.

Indexed Universal Life Insurance

Indexed universal life insurance offers flexible premiums and different investment options. This type of policy is a less risky version of variable universal life insurance and typically includes both a maximum and minimum rate of return. Instead of choosing direct investments, the policyholder chooses an index, such as the S&P 500, in the stock market. The insurance company then sets artificial limits on the rate of return. During a year when the chosen index is up, these limits will seem to work against the policyholder, capping the rate of return below the index performance. However, during a year when the index is down, the limits will work in the policyholder’s favor by insulating the policy’s cash value from loss. Understanding the role of the stock market in indexed universal life insurance is crucial for making informed decisions about this type of policy.

Getting Started with Permanent Life Insurance

When considering permanent life insurance, there are several steps you need to take to ensure you make the right decision. These steps include assessing your insurance needs and understanding the policy costs associated with permanent life insurance.

Assessing Your Insurance Needs

In my 27 years of insurance, assessing your needs is the biggest thing. When you’re young and have kids, the number one priority is to make sure that if you die, your spouse and children are taken care of. If you can only afford a certain monthly premium, be sure you can get at least ten to fifteen times your income in life insurance. If you can easily afford that, assess your need for something permanent. This involves determining the coverage amount that would adequately protect your loved ones financially in the event of your death. Consulting with a financial professional can help you determine the appropriate coverage amount based on your specific financial obligations and goals. Additionally, a financial professional can guide you on the different types of permanent life insurance policies and their features to help you make an informed decision.

Understanding Policy Costs

Permanent life insurance typically has higher premiums compared to term life insurance. This is because permanent life insurance offers lifelong coverage and has a cash value component that grows over time. The higher premiums cover the cost of insurance and contribute to the cash value growth. It is important to consider the long-term financial commitment associated with permanent life insurance and ensure that the policy costs align with your budget and financial goals. Permanent life insurance costs can vary based on factors such as your age, health, lifestyle, and the specific policy and coverage amount you choose, while term policies only offer a death benefit and do not have a cash value component.

Step-by-Step Guide to Purchasing Permanent Life Insurance

Once you have assessed your insurance needs and understood the policy costs, you can proceed with purchasing permanent life insurance. The following step-by-step guide will help you navigate the process and make informed decisions.

Step 1: Determine Your Coverage Needs

The first step in purchasing permanent life insurance is to determine your coverage needs. This involves evaluating your financial obligations, such as mortgage payments, outstanding debts, and future expenses like college tuition or retirement income replacement. By considering these factors, you can calculate the appropriate coverage amount that would provide financial security for your loved ones in the event of your death.

Step 2: Compare Different Permanent Life Insurance Policies

Once you have determined your coverage needs, it is important to compare different permanent life insurance policies. This includes understanding the features and benefits of whole life policies, universal life policies, variable life policies, and indexed universal life policies. Comparing the policies will help you choose the one that aligns with your financial goals and offers the desired level of flexibility and risk tolerance.

Step 3: Choose a Reputable and Financially Stable Insurance Provider

Choosing a reputable insurance provider is an important step in purchasing permanent life insurance. Look for insurance companies with a strong financial rating and a history of reliable customer service. It is also advisable to do some research on the company’s reputation and customer reviews.

Step 4: Apply for the Policy

Once you have selected a permanent life insurance policy and an insurance provider, you can proceed with applying for the policy. This involves completing an insurance application form and submitting any required documentation. The application process may also include a medical exam, depending on the policy and coverage amount. It is important to provide accurate and complete information during the application process to ensure the policy is issued accurately.

Step 5: Undergoing the Medical Exam

If a medical exam is required as part of the underwriting process, you will need to undergo this step. We will either complete an application over the phone with you or send it to you to complete. Then, we will set up a medical exam for you at no charge. A paramedical company will come out and ask health questions, and depending on the amount of coverage, they might also take a blood sample, for which you will have to fast for 8-12 hours before. They will come to your house, your office, or you can go to them. They will also ask for a urine sample. Finally, they will run a pharmacy report to see what medications you have been taking. The results of the medical exam help the insurance company assess your health status and determine the insurance rates for your policy. Maintaining a healthy lifestyle leading up to the medical exam can positively impact the insurance rates you are offered.

Step 6: Policy Review and Approval

After completing the application and the medical exam, the insurance provider will review your application and medical information. This process is known as underwriting. Once the underwriting process is complete, the insurance provider will review the policy terms, including the coverage amount, premium payments, and any additional riders or benefits. If the policy meets the underwriting criteria, it will be approved, and you will receive the policy documents for review.

Advantages and Disadvantages of Permanent Life Insurance

Permanent life insurance has both advantages and considerations that should be taken into account when making a decision. Understanding these can help you determine if permanent life insurance aligns with your financial goals and priorities.

Advantages of Choosing Permanent Life Insurance

Choosing permanent life insurance offers several advantages. You should always apply, it is free to apply, and you are not obligated to pay the policy once it comes back. First and foremost, permanent life insurance provides lifelong coverage, making sure that your loved ones are protected financially in the event of your death. Additionally, permanent life insurance policies have a cash value component that grows over time. This cash value growth can provide a tax-deferred savings or investment account, which can be accessed during your lifetime. Permanent life insurance policies may also offer loan options, allowing you to borrow against the cash value of the policy if needed.

Considerations and Drawbacks

While permanent life insurance offers several advantages, there are also considerations and drawbacks. One consideration is the higher premiums associated with permanent life insurance compared to term life insurance. Permanent life insurance costs more because it provides lifelong coverage and has a cash value component. Additionally, surrender charges may apply if you decide to cancel or surrender the policy before a certain time. It is important to carefully consider the long-term financial commitment and affordability of permanent life insurance before making a decision.

Conclusion

Understanding the nuances of permanent life insurance, policies that never expire, is crucial for financial planning. With various types like whole life, universal life, variable life, and indexed universal life, selecting the right policy aligning with your insurance needs is paramount. Assess cost and coverage requirements, and choose a reputable provider for peace of mind. Remember, permanent life insurance offers long-term benefits but demands careful consideration. By following a step-by-step purchasing guide, you can secure your future and loved ones’ financial stability effectively. Stay informed, weigh advantages against considerations, and make an informed decision tailored to your financial goals.

Author’s Bio

Andrew Darlington, an insurance professional since 1997, established Veritas Insurance in 2009. He is the holder of CBIA, CIC, CRM, and AAI certifications, demonstrating a strong focus on cultivating robust client relationships and ongoing education. On his website, you can find comprehensive industry insights, case studies, and expert recommendations, showcasing his dedication to customized solutions and unwavering integrity.