When you buy permanent life insurance, you are actually getting more than basic life insurance coverage. Your premium payments go first to pay the cost of keeping the policy in force. However, a portion of each premium also goes to fund a cash value account inside your policy. That cash value grows tax-deferred, and is credited with a guaranteed interest rate that is often much more competitive than what you could receive using traditional savings account.
Permanent Life Insurance
Permanent insurance is designed to be there for your named beneficiaries – whenever it’s needed. Rather than expiring after a set number of years, a permanent life insurance policy will stay in force as long as you pay the premiums, until the policy maturity date (often age 100, but sometimes age 110 or even higher.)
Different Types of Permanent Insurance
The two main types of permanent life insurance are “whole life” and “universal life” policies.
With a whole life policy, you pay the same, fixed premium amount for the life of the policy.
Universal life insurance policies are a little bit different. While the policy will have a target premium amount based on current insurance company assumptions, there is flexibility with premium payments. You can “overfund” a policy to increase the amount in the cash value, and limit the amount you’ll need to pay in premiums in the policy’s later years. If money is tight, you can make smaller premium payments or sometimes even skip them altogether, if there is sufficient cash value inside the policy to pay for the cost of insurance. Of course, this can impact the “health” of your policy, so it’s important to understand the impact of changing your premium payments before doing so.
Benefits of Permanent Insurance
There are many reasons to consider buying permanent life insurance.
First, insurance coverage is guaranteed for the lifetime of the insured. This means that changes in your health will not impact your existing coverage or required policy premiums.
With whole life insurance policies, you will know up front what your insurance premiums will be – for your entire lifetime. This can make budgeting and planning simple. Your premiums are based on your attained age and health status when you apply for coverage. So, the sooner you buy permanent insurance, the lower your financial outlay will be.
The flexibility of the cash value component is another major draw for permanent life insurance policies. In most cases, policyholders have the ability to take loans or make withdrawals from the cash value at any time – with no tax consequences! However, as with making changes to the amount of your premium payments, taking money out of your insurance policy may mean that you’ll need to make larger premium payments in later years in order to keep the policy in force.
The amount of coverage you purchase is also guaranteed for your lifetime – as long as you make premium payments. This means that the funds you want to make available to your named beneficiary will be there when they’re needed. And, as with other life insurance products, permanent insurance death benefits are income tax free to the recipient in most cases.