Is Permanent Life Insurance Right For Me?
You might even be wondering if you should buy permanent life insurance?
The answer to that question can come down to understanding your options, especially if you’re trying to decide between purchasing term life insurance or permanent coverage.
Once you know the differences and benefits of each, you should be able to make a clear choice if a permanent life insurance policy is best for your situation.
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What is permanent life insurance?
Permanent life insurance, it just that – permanent. This type of insurance meant to stay with you your entire life. Life long coverage is not the only advantage of permanent life insurance.
Most permanent life insurance policies can build up a cash value. Cash inside of a permanent policy can accumulate on a tax-deferred or even tax-free basis. So you do not have to die to see benefits from a permanent policy. Over time as the cash value grows you have the opportunity to borrow or withdraw cash from your policy, or even using its cash value as collateral.
People like to build cash value for many reasons, but some of the most common uses are:
- to help pay for a child’s education
- generate a stream of tax-free income during retirement
- or maybe to even start a business.
As you can see the advantages of cash value are endless.
Term vs permanent life insurance
You may be wondering should I buy term or permanent insurance. Knowing how each works and the pros and cons can help you decide which is right for you. So let’s take a look at each.
Term
While permanent life insurance is life-long, term insurance covers life insurance needs for only a set period of time or term – typically 10, 15, 20, or 30 years. After the specified period ends the coverage ends as well.
Why would you want temporary insurance? Let’s say you buy a house and are looking to pay it off in 15 years. In that case, you might buy a 15-year term life insurance to cover just those 15 years. After the mortgage is paid-up, the need to insure against the risk simply disappears. The expense has a set time period, so the insurance you buy does too. You can easily see that term insurance makes sense for a temporary risk.
Another thing to bear in mind is that term life insurance just has a death benefit. This means the amount paid out to the beneficiary is always the face value of the policy. If you buy term life insurance for $250K for example, in the event of the insureds death, then the policy pays out $250K.
Permanent
Permanent life insurance has a death benefit just like term insurance, but permanent life insurance also has something called a cash value that grows tax-deferred. That’s why people sometimes choose permanent insurance – they get to save money in a tax-shelter inside the life insurance. What this cash value is and how it works depends on the type of permanent life insurance policy you buy.
| Term | Permanant |
|---|---|
| Temporary Coverage | Permanant Coverge |
| Lower premiums | Higher premiums |
| No cash value | Builds cash value |
| Rent policy | Own policy |
Cost of permanent life insurance
Below you can see a chart that compares the cost of permanent life insurance vs. a term policy.
The figures are for illustration purposes only, but they do help to see you how the costs will differ between the two policies. All prices shown in the chart are for a 35-year-old non-smoking male and have a has a death benefit of $250K.
The premium for the term is just $27 a month. Both the permanent policies have a substantially higher premium than the term policy, but you can see each will accumulate cash value.
One of the most significant advantages of permanent coverage is you can not outlive the policy. In a term policy, you run the risk of outliving the policy.
Think about this, if you buy a 30-year term at age 35, and you live to age 65 you will have spent almost $10,000, and then the policy expires worthless and has no value. This does not happen in a permanent plan. At age 65 in both examples, you will have six-figure cash value accounts.
30 Year Term
- Male
- Age 35
- Non Smoker
- $250,000 Death Benefit
- No Cash Value
IUL
- Male
- Age 35
- Non Smoker
- $250,000 Death Benefit
- $132,619 @ age 65
Whole Life
- Male
- Age 35
- Non Smoker
- $250,000 Death Benefit
- $112,775 @ age 65
Learn more about: The average cost of life insurance
Pros and cons
With any life insurance purchase, there are pros and cons. Here are some and the advantages and disadvantages of a permanent policy.
| Pros | Cons |
|---|---|
| Policy lasts your entire life | Higher cost than term insurance |
| Builds cash value | Surrender charges in early years |
| Tax-deferred growth | Interest can accrue on policy loans |
| Flexible premiums | Possible lower return on cash value |
| Income tax-free death benefit |
Types of permanent life insurance
Permanent life insurance comes in two types: Whole Life and Universal Life
Whole Life Insurance
This type of insurance has a fixed premium and a level death benefit which means that the policy pays out the same regardless when the insured dies. This is for people who like guarantees and don’t like to take too much risk. Whole life does have a dividend component, the size of the dividend depends on how well the insurance investment did and how much of their earnings they want to set aside for policy holders.
Universal Life Insurance
Universal life generally differs from Whole Life in that premiums are flexible and can be increased or reduced according the financial needs of the policy holder. Sometimes the sun shines but we have to plan for rainy days as well. Flexible premiums allows you to contribute more when times good – but you can scale back payments when times are hard. However, if premium contributions become insufficient to pay for the policy, the policy will terminate and may not be reinstated.
Guaranteed Universal Life Insurance
These policies are a sort of hybrid between permanent and term insurance. A GUL lasts your entire life like a traditional permanent policy, but it does not build up any cash value. A GUL is the most affordable type of permanent insurance.
Indexed Universal Life Insurance
This perhaps the most complex of all the Universal Life Policies. Typically, an Equity-Indexed Universal Life insurance policy has a death benefit that grows partly from the contribution from a fixed-interest earning account and partly from interest earnings linked to a stock market index of some kind. The principal value of this type of policy is that the policyholder can choose how much premium to allocate to a fixed-interest and how much of the premium to put in the variable, index lined account.
Variable Life Insurance
This policy is for policy-holders who want to put the premium towards an investment portfolio. The advantage of this approach is that the policy can be surrendered for its cash value at any time. However, the cash value and the death benefit are not guaranteed – although most policies will stipulate that the death benefit cannot fall below a certain amount. This is for people who like an investment element to their insurance.
Conclusion
In conclusion, permanent life insurance is best for individuals who:
- Don’t want to risk outliving their policy
- Can afford a higher premium to build cash value
- Are looking to lock in premiums for a more extended period
- Want flexible premium options
In many cases, permanent life insurance is merely a great way to put away money in a tax-advantaged account – and once you have a policy in force (and keep paying the premium), you are guaranteed to have the policy for the rest of your days. If these sound like your goals then this may be the plan for you.
How to get quotes?
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