Many of you might have heard the terms “whole life” or “universal life” and might be wondering what they are. These are actually different types of permanent life insurance. Although permanent life insurance has been around since the 1940’s, much of how it works, the different types of policies, and who the policies are most suitable for is still a black box for many. Today we would like to clear the air about permanent life insurance so that you may be the judge on whether it’s right for you and your family.
What is permanent life insurance?
Permanent life insurance is an overall term for life insurance policies that do not expire, compared to term policies that expire within a given number of years (i.e. 5, 10, 15, 20, 30 years).
Often, permanent life insurance allows you to build cash value that grows tax-deferred and can be accessed tax-free through loans and withdrawals. Depending on how much cash value is built up in the policy, loan amounts may not have to be paid back (since you are leveraging against your own death benefit). Carriers typically will charge either a very low interest or no interest on the loan.
Permanent life insurance also offers a plethora of riders including long term care, critical illness, term riders, and more. Most of the time, these riders will allow for a portion of or the entire coverage amount to have a dual purpose: a death benefit and for the purpose of the rider. For example, a $500,000 life insurance policy with a long term care rider will allow for the $500,000 to be used for long term care if the individual needs it in his/her lifetime and if not, the $500,000 will be passed down as a death benefit to his/her beneficiary.
How does it work?
Permanent life insurance allows you to put one amount of money to be used for several different purposes: life insurance coverage, high interest savings or investment account for supplemental retirement income, and additional rider coverage.
It’s no surprise that permanent life insurance can be such a confusing topic; each permanent life insurance policy should be designed for the individual’s needs and each policy is highly customizable. In addition, almost every carrier has a permanent life insurance product with a specific focus, suitability, and cost structure and there are 852 life insurance companies in the U.S. (That’s a lot of different products!)
The process of purchasing a life insurance policy usually starts with an analysis of the individual’s goals and needs including:
How much overall coverage is needed (and how much is already in place)
Interest in investment and risk tolerance
Long term goals and other invested assets
Desired length of payment
Then, once all that is determined, the insurance advisor will select a carrier and product that would be most suitable for the age, desired needs, and health risk of that individual to apply for. After an application is submitted and a medical exam completed, the insurance carrier will (after underwriting) determine a health rating and a premium amount for the policy. Then the policy will be reviewed and delivered to the client.
For example, if a 35 year old male needs:
$1,000,000 of life insurance coverage (liabilities + 5 times his/her annual income)
Supplemental retirement account
Low risk tolerance
Long term care protection
$250,000 index universal life insurance policy
Long term care rider
Overfunded for supplemental retirement income. The cash value grows interest based on an index that has a designated cap of 15% and a floor of 0.75% so the individual will not lose money when the market is down.
$750,000 20 year term life insurance policy (which is what he had left on his mortgage)
Premiums are paid for 20 years for the term policy and until age 65 for the permanent life policy
Permanent life insurance can be a great product to add to your family’s plan when used in the right way. Although it is pricier than term life, permanent life insurance can provide much more value for you and your family. Some of the most popular benefits of permanent life insurance includes: lifelong protection, living benefit riders, tax-free supplemental retirement income, and protection against creditors for your assets.
When learning about the best life insurance for you, make sure to consider permanent life insurance or a combination of term and permanent life insurance, and clearly understand the guidelines on how to utilize this vehicle to maximize its long term benefits.
Since these policies are highly customizable, it’s best to work with an experienced advisor and go through a consultation before choosing the right policy for you.