Permanent life insuranceÂ is defined as aÂ whole-life policy, one that doesnât expire and may provide a number of benefits during theÂ policyholderâs life and when they pass away. It’s not a specific type of insurance, as such, and is instead an umbrella term used to describe life insurance policies that are not fixed to specific terms.
Types ofÂ PermanentÂ Life InsuranceÂ Policies
There are two types ofÂ permanent policies:Â Whole Life InsuranceÂ andÂ Universal Life Insurance. UnlikeÂ term life insurance, which is fixed to a specific term,Â permanent insuranceÂ policies are designed to be paid for the entirety of theÂ policyholder’s life, with aÂ death benefitÂ released upon their death.
Take a look at these pros and cons to see how aÂ permanentÂ life policyÂ can benefit you.
Pro: Lifelong Coverage
Permanent life insuranceÂ is not limited to a fixedÂ period of timeÂ and providing you keep meeting those monthly premiums, theÂ death benefitÂ will be released to your heirs when you die.
Pros:Â Cash Value
Permanent life insuranceÂ is often likened to a savings account and aÂ life insurance policyÂ combined, as it has aÂ cash valueÂ that you can collect as you see fit. You can see theÂ policy’sÂ cash valueÂ during the term and withdraw as much money as you need.
What’s more,Â the cash valueÂ grows on aÂ tax-deferredÂ basis, which means the policyholder is not required to pay taxes on the money it generates.
Pro:Â Premium PaymentsÂ Don’t Change
With whole andÂ universalÂ life policies, yourÂ premium paymentsÂ remain the same, which means you don’t need to worry aboutÂ variable life insuranceÂ rates changing from one year to the next. You should pay the same in the first year as you pay in the 20th year.
Con: It’s More Expensive
The extended coverage and extraÂ investment optionsÂ come at a greatly inflated price, asÂ whole-life policiesÂ tend to be much more expensive than their term-life counterparts. How much you pay will depend on theÂ amount of coverageÂ provided, but it’s generally a lot higher than aÂ termÂ life policyÂ with the same payout.
Con: It Doesn’t Account for Inflation
A lot can happen in 50 years and aÂ deathÂ benefitÂ that seems like a huge sum now may be worth much less in 40 or 50 years when you eventually pass away. However, it’s worth noting that yourÂ life insurance premiumsÂ will remain the same as well, so itâs all relative.
Cons: It’s Complicated
Term-life insuranceÂ is relatively simple. You pay a sum of money every month and if you die within the term, yourÂ loved onesÂ will be given a cash sum. However, once you consider theÂ cash value,Â tax-freeÂ withdrawals, potential dividends, and more,Â permanent insuranceÂ policies are more complicated.
OtherÂ Types of Life Insurance
There are severalÂ types of life insuranceÂ and if you’re being rejected forÂ permanent life insuranceÂ or receive quotes that are far too high, it’s worth looking into one of these other options.
Term Life Insurance
With aÂ termÂ life insuranceÂ policy, you won’t be covered for yourÂ entire life, but you will receive extensive coverage for aÂ number of years. These policies are available for less, because if theÂ policyholderÂ outlives the term they won’t collect theÂ death benefitÂ or any other payments and theÂ life insurance companyÂ will secure all the profits.
Final ExpenseÂ Life Insurance
Seniors are generally refused for term andÂ whole-life insuranceÂ policiesÂ because the risk is too high. However, finalÂ expense life insurance can provide many of the same benefits, with aÂ death benefitÂ paid to yourÂ loved onesÂ when you die. The premiums tend to be high and the payout low, but if you’re above the age of 60 this is one of the few options you have forÂ life insurance coverage.
Final expenseÂ insurance is often used to pay for funerals,Â estate taxes, and debt, but there are no restrictions regarding how it can be used.
Joint Life Insurance
JointÂ life insurance policiesÂ are targeted at spouses seeking to provide cover for each other and their children. The options include first-to-die insurance, where the money will go to the surviving spouse; and second-to-die insurance, which pays theÂ death benefitÂ to beneficiaries when both applicants die.
IsÂ Permanent Life InsuranceÂ Right for you?
If you can get your head aroundÂ permanent life insurance and understand what you’re paying and what benefits itâs providing, it could be the right choice. This is especially true if you have the money to meet those payment obligations every month and want the extra asset that theÂ cash valueÂ can provide.
However, if yourÂ insurance needsÂ revolve entirely around protecting yourÂ loved ones,Â term-life insuranceÂ is probably the better option. AÂ termÂ life insuranceÂ policyÂ generally offers a high payout for low premiums (when compared toÂ wholeÂ life policies). This sum can be used to clear debt, pay off the mortgage, and set yourÂ loved onesÂ up for life. And just as importantly, it provides you with theÂ peace of mindÂ that comes from knowing your nearest and dearest won’t be destitute if you die.
Older applicants may struggle to get affordable term andÂ whole lifeÂ insuranceÂ products, but that’s whereÂ final expenseÂ insurance comes in. This is a limitedÂ type of policyÂ with aÂ coverage amountÂ of less than $50,000, and an average amount of less than half thatâmore than enough to cover funeral expenses and most types of debt.
Summary: There are Always Options Available
You’re never too young, old or sick to be considered for life insurance.Â
It’s all about probabilities. Underwriters will consider all the data you provide them with and use this to calculate theÂ likelyÂ date of your death. It sounds morbid, but when your business is death, things can get a little dark every now and then.
Imagine, for instance, that you’re a 20-year-old male with a clean bill of health and a brand-new family to look after. AÂ life insurance companyÂ will be more than happy to provide you withÂ term life insurance, because these products are limited to 30-years and the odds are high that you will live to be 50. Not only will they be more than happy to sign you up, but they will also offer you a good price because you’re deemed to be such a low risk.
If you opt for a permanent life insurance policy, the premiums will be higher because theÂ death benefitÂ payout is more likely. However, they also know there’s a good chance you will face financial difficulties during the next few decades, in which case you may stop making those payments or accept theÂ cash valueÂ as soon as it reaches a respectable sum.
As you age, your risk increases, and the same applies for smokers and people with pre-existing medical conditions. They will still be more than happy to receive your business, it just means your options may be a little more limited and your premiums may be much higher.
So, keep searching, keep comparing, and work on improving your health to bring those premiums down.
What is Permanent Life Insurance and How Much do you Need? is a post from Pocket Your Dollars.