Benefits of Permanent Life Insurance

What is Permanent Life Insurance ?

Permanent life insurance is also known by other names such as whole, ordinary, universal, adjustable and variable insurance. A permanent life insurance policy is designed in a manner to offer life-long protection for the individual. The death benefits are paid for as long as the premiumis paid. In permanent life insurance the coverage never expires. The beneficiaries are paid the death benefit at the time of death of the insured, no matter at what age. If the requirement for insurance is for a shorter period, term life insurance may be the solution.

In this case the protection offered by the policy is only for a specific period of time. The death benefits are paid only if the insured individual dies within the term. Otherwise the policy simply expires. This kind of insurance is also called by the name temporary life insurance.
Permanent life insurance policies sometimes have an additional feature called cash value or cash surrender value. These variations have grown more popular in the recent years. If the premium payments are more than the cost of the insurance, the extra amount is diverted to a savings account that earns interest. The amount depends on factors that include the face amount of the policy, the length of period for which the premium amount has been paid, whether the individual has availed of a loan on the policy, the face value of the policy, etc. The cash value option allows the individual to cancel the policy and receive the cash value as a lump sum. One can also choose to utilize the cash value to pay the premium, a partial withdrawal of the cash value as a loan is possible. Here, the cash value is seen as a means to fund your insurance payments and not as an income through an investment.

Whole life v’s Permanent Life Insurance

Whole life insurance or ordinary life insurance is the most common type of permanent life insurance. The premiums are almost constant over the life of the policy. The premium specified in the policy should be paid periodically. The insurer completely manages the manner in which the cash value is invested. Whole life insurance policies are more expensive than term life insurance policies. Common variations of the whole life insurance policies include limited payment insurance that requires premiums to be paid only till the age of 65 where the premiums are higher and the interest sensitive insurance where the death benefit and premiums are constant but has a variable cash value that varies according to interest rates. However, such variations may not be available through all insurers.

There are many variations of such policies offered by different insurance companies that stay within legal stipulations and guidelines. Universal life or adjustable life insurance allows the individual to pay any amount as premiums at any time after the specified initial amount.
If finances are tight, you can reduce the amount of premiums that you pay and vice versa. However, there are certain minimum and maximum amounts that are specified. These policies allow the individual to increase or decrease the death benefit that is payable. In this case, the investments
are tied to shorter term interest rates. The potential for profit and loss increases in this case. The insurance company usually requires the insured to produce a certificate of good health as evidence in case she/he wants to increase the death benefit. These policies help the individual to exercise control over the premium paid, the life insurance protection and the method of cash value investment.

Variable Life Insurance
In variable life insurance policies, the death benefit and cash value amounts are market linked and thus vary accordingly. The premium amount is invested in stocks, bonds, a combination of these instruments, or into accounts that earn an interest for a principal amount. The cash value for such variable policies is not guaranteed. However, the insured can allocate the premium according to the risk he/she is prepared to take. The option of earning a good cash value through appropriate investments is available. The death benefit and the cash value can decrease if the investment performs poorly.

The benefits of permanent life insurance are as follows:

• Protection for life is guaranteed as long as the premiums are paid.
• There are options of paying either fixed or variable premiums depending on one’s personal financial status and needs.
• These policies enjoy favorable tax treatment. When the policy is active, there is no tax to be paid on the earnings of the policy. Depending on the premium that is paid, an individual can also avail of loans on the policy and these do not amount to taxable income either. Such withdrawal amounts are limited to a maximum of the premium amounts paid.
• Cash value of a permanent life insurance policy can be surrendered in part or whole for a refund as cash. Alternately, it can be converted into an annuity.
• A rider can be added to a permanent life insurance policy. This option is used to purchase additional insurance without taking a medical examination or providing evidence of insurability.
• These policies cost more in the early years when compared to term life insurance policies, but become more economical later on.

The disadvantages of permanent life insurance are as follows:

• High premiums may be a disadvantage and stop one from buying enough protection.
• This type of insurance is worth the cost only if kept for a long enough period.
• Loans that are availed on the policy have to be paid back with interest. Non repayment results in lower death benefit to the beneficiaries. Taxes would be due on outstanding loans, if the policy lapses..
It is recommended that a whole life insurance policy is not viewed as an investment tool but rather as a means of protection. The rate of return is very low in a whole life insurance product even if the tax savings are taken into consideration. However, if you need to purchase life insurance for your loved ones, the cash value option and the tax benefits are added incentives and one might as well choose a whole life insurance policy.

Disclaimer:This article is not intended to replace in any way proper financial advice given by a registered financial or insurance broker. Professional advice should always be sought when seeking financial advice.

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