PERMANENT LIFE INSURANCE
I recently saw a clip of Keanu Reeves being interviewed by Stephen Colbert on “The Late Show.” Colbert asked Reeves what he thinks happens to people after they die.
The actor’s response was profound and touching. Reeves said, “I know the ones who love us will miss us.”
He’s absolutely right, of course. Those who love us will miss us. And this applies not only to the emotional aspects in the relationship but the practical and economic aspects as well. It’s important to think about the financial support that will be missing for your family if you die.
How will your family and loved ones pay the mortgage and buy groceries, fund college accounts, or do all the things they are used to. Without your financial contribution to their lives, there will still be a lifetime of bills and expenses that they will have to face alone.
The power of any insurance is that it mitigates and reduces risk. It softens the financial blow of unforeseen and unpredictable reversals. And it is no different when it comes to life insurance.
Despite our best efforts, we are all going to die. That’s part of the deal. And the risk is that this universal outcome can happen at any time for any of us.
Life insurance is a way to reduce the risk of financial hardship for your family if are no longer there to provide for them.
Life insurance works by providing a contracted sum of money to your loved ones or dependents when you die. Anyone who has someone who depends on them for financial support should consider having a life insurance policy to provide for their dependents in the case of death.
There is two basic kinds of life insurance: permanent and term. In this article we will discuss everything you need to know about term life insurance what it is, what it covers, how it works, the various kinds of permanent life insurance available, why you would choose a permanent life insurance policy over a term policy, how much it costs, and how to find a permanent life insurance policy.
We will teach you everything you need to know to determine if a permanent life insurance policy is right for you.
WHAT IS PERMANENT LIFE INSURANCE?
Permanent life insurance is a life insurance policy that does not expire. (This differs from a term life insurance policy that is only issued for a specific number of years.)
When you buy permanent life insurance and pay the premiums, the death benefit never expires and will always be there no matter when you die.
Usually, permanent life insurance policies are set up to have a death benefit with a savings portion, which allows the policy to build cash value, which means that a portion of the premiums you pay are invested and allowed to accrue.
The savings element of these policies allow the policies to build a cash value. The insured can use the cash value (or borrow funds from it) to pay for medical expenses or college.
You might be wondering how cash value is built in a policy. Obviously, as a person ages, their chances of dying go up, and this means that the costs to have insurance would naturally increase as a person ages.
When you buy a permanent life insurance policy, the insurance company keeps premiums level over your lifetime. This means that when you are young, the premiums will be much higher than they need to be to pay claims.
In a way you are “overpaying” when you are young to cover the costs of the insurance when you are older. The company then invests this“overpayment” and builds a reserve, or cash value.
By law, when these “overpayments” reach a certain amount, they must be made available to the insured as a cash value if he or she decides to discontinue the original policy.
The cash value of the policy is an alternative benefit under the policy, not an additional one, meaning that if you take the cash value out of the policy, it will not provide a death benefit.
HOW DOES PERMANENT LIFE INSURANCE WORK?
The two main kinds of permanent life insurance are whole and universal life insurance policies.
When you purchase a whole life policy, you will receive a death benefit and the savings you accrue in the policy grow at a guaranteed, fixed rate.
Universal life insurance also has a death benefit and a savings portion of the policies, but instead of having fixed premiums and savings rates, the premium structure varies and the savings rate is based on market performance and is not at a fixed rate.
Beyond these two main categories, there are several other variations types of permanent life insurance including variable life and variable-universal life, and there are variations within these subcategories as well depending on your insurer.
The basic differences in these options are the way the premiums are invested and also the amount of flexibility to change the premium amount or death benefit without getting an entirely new policy.
To help you understand your options, we will give you a more detailed description of each of these options and their investment strategies.
WHOLE LIFE
Whole life provides a death benefit with a savings account. It is the most conservative of the permanent life insurance vehicles and growth is based on dividends the company pays to you at a guaranteed rate, meaning that the rate never changes, regardless of what happens in the stock market. Because the money is invested in “safe vehicles,” the growth is slower than other insurance vehicles and there is very little risk involved in the investment.
UNIVERSAL LIFE
Universal life offers a death benefit and a saving vehicle, but with more flexibility than whole life insurance. With a universal policy, you can change the amount of the death benefit and also adjust your premium payments after enough money has accumulated in your account.
You can even pay premiums from the account itself. This can be a very valuable option as your circumstances and needs change throughout your life. The cash value generally grows at a money market rate of interest.
VARIABLE LIFE
Variable life gives you a death benefit with a savings account that can be invested in stocks, bonds, and mutual funds. Variable life insurance policies are invested in the market and so while this can allow the value of your policy to grow more quickly, it also carries a more inherent risk.
Unlike whole life, the growth of your savings are not guaranteed. If your investments do not perform well, your cash value and death benefit may even decrease. However, there are various policies available that do guarantee that the death benefit will not drop below a certain minimum amount.
VARIABLE-UNIVERSAL LIFE
Variable-universal life combines the features of both variable and universal life insurance policies. This means that these policies will give you the flexibility to adjust and change the amount of the death benefit and the premium throughout the life of the policy (like a universal life policy) and they also allow you to invest in more aggressive growth vehicles such as stocks, bonds, or mutual funds (like a variable life policy).
This is a very general overview of these main permanent life insurance options. Remember that there are complexities and variations in every life insurance policy and differences between carriers as well.
Your insurance advisor can carefully walk you through the details of whatever type of life insurance will best suit your needs and circumstances and give you the right coverage to protect your loved ones in the event of your death.
The following chart may be helpful in giving you a way to reference the options and components in each kind of permanent policy:
WHY WOULD YOU CHOOSE A
PERMANENT LIFE INSURANCE POLICY?
As we said before, the main distinction between permanent and term life insurance is that term policies only provide coverage for a certain, stated period of time, such as 20 years. In addition, term policies don’t have a cash value component.
This means that term life insurance premiums are less expensive than permanent life insurance, but it means that you don’t receive a death benefit if you outlive the policy.
In other words, if you buy a 20 year term policy, you only receive a benefit if you die within that 20 years.
For many people this is a good option because, as we said before, life insurance is there to take care of your family if you aren’t able to.
As you age, so do your dependents and your obligation to take care of them financially will decrease over time. By the time the term of the policy has finished, your dependents may be in a position to provide for themselves.
Permanent life insurance policies are good for people who have important financial obligations that are not dependent on time. Some examples of this include providing a way for your family to pay estate taxes when you die. A permanent life insurance policy could help cover this tax bill and this is not an expense that will decrease over time.
Additionally if you have dependents that will need continuing care and financial support throughout their life, a permanent policy is a wise investment.
Permanent life insurance policies that build cash value are useful for people who need lifelong coverage or have a large investment portfolio that they want to diversify.
The other benefit of choosing a permanent life policy is the tax benefits. If you choose either a term or permanent life insurance policy, the benefit is paid to your beneficiaries free of income tax.
However, permanent life insurance offers a few additional tax benefits that aren’t available with a term policy:
The cash value for permanent life insurance policies grows tax-deferred. This means that you only pay taxes when the funds are withdrawn, similar to gains in a retirement account.
If you receive dividends or surrender your coverage for cash value, there are no income taxes required unless the amount of money you receive is greater than the amount you’ve paid in premiums.
You also pay no taxes if you take out a policy loan, as long as the policy stays in effect. While you’re not taxed on other types of loans, this is important in the context of policy loans as you aren’t actually required to pay the money back to the insurer.
This is also a good place to note that you can carry both term and permanent life insurance policies, especially since they each perform a different function in your financial strategy.
Talk to an experienced life insurance agent about your goals and needs and reasons for obtaining life insurance and they can help you set up the right policy or policies for you and your family.
HOW MUCH DOES PERMANENT LIFE INSURANCE COST?
As we have noted previously because permanent life insurance provides a death benefit no matter when you die, the insurance company is guaranteed 100% to pay a death benefit to your beneficiaries as long as all the premiums are paid. That means that permanent life insurance rates are significantly higher than those for term life insurance.
For example, it would not be unusual for a guaranteed universal life insurance policy to be four times the cost of a term policy with similar coverage, while a whole life policy could easily be 10 times the cost of a term policy.
This is one of the reasons that we recommend permanent life policies for our clients only if they have specific long-term or “permanent” financial obligations or for estate and tax purposes.
Most permanent life insurance companies will allow you to choose how you pay your premiums. For example, some of the options include:
Paying premiums throughout your entire lifetime (either annually or monthly)
Paying premiums for a determined number of years (such as 20 years)
Paying premiums until you reach a specific age (such as 65)
Paying the entire premium in a lump-sum payment
Because the premiums you pay are building cash value, you will have higher rates for each premium if you choose to make fewer payments.
But by paying more money early on in the life of the policy, you can actually get the benefit of building a larger cash value through the power of compounding.
When the value of the account is bigger at the start, it will grow more interest for a longer period.
Remember that if you choose a universal life insurance policy, you have the option of “flexible premiums”, which means that you can use the policy’s cash value to make your premium payments. This can be helpful if you have an unexpected expense come up.
You can also choose not to touch the policy’s cash value until it’s fairly large, and then simply skip paying premiums later in life.
However, this benefit is available only if you’ve already put enough money into the policy that it has a sizable cash value. And you will need to monitor the cash value in the policy since costs can increase or the policy may not achieve its projected returns, because if the policy’s cash value is used up, you will lose your death benefit.
HOW DO I FIND THE RIGHT
PERMANENT LIFE INSURANCE POLICY?
Finding the right permanent life insurance policy starts with finding the right life insurance agent. You want to make sure you have the right policy, without paying for a policy that doesn’t meet your needs.
A professional life insurance broker that has knowledge and integrity can make all the difference in this process.
At Insurance Professionals of Arizona, we specialize in providing life insurance policies that protect our clients’ financial life and minimizes risks for them and their families.
There is an old saying that you don’t need it until you need it. And this is especially true in the case of life insurance.
When we die, the people who love us will miss us. And as difficult as that loss and grief will be, it will be even harder without the right life insurance policy in place.
Our office has a team of experienced life insurance brokers who understand the importance of protecting you, your assets, and your family so that the worry, stress, and pressure of death isn’t compounded by financial concerns.
If you are ready to make sure that your family has the right protection for any situation, contact us today and we’ll find the right policy for you whether it is a permanent life insurance policy, a term policy, or some combination of the two. We are here to help you every step of the way.
We’re here to help! Call us today.
Now It’s Your Turn
I hope You Understanding What is Permanent Life Insurance and How Does it Work
And now I’d like to turn it over to you:
Did you learn something new from this
guide?
Or maybe you have a question.
Either way, leave a comment below right now.
