Permanent life insurance basics: an overview of cash-value policies
When it comes to buying life insurance, you have a choice between permanent life and term life insurance. If you are looking for life insurance at an affordable price, you may think term is your best bet. However, you shouldn't overlook permanent life insurance simply based on price. Depending on your needs, permanent insurance such as whole life insurance might be a better fit you and your family.
Life insurance for a lifetime
While term life may initially have lower premiums, policyholders could run into trouble when the term period is over and there is still a need for life insurance protection. At the end of a 20 or 30 year term, you could find that purchasing a new life insurance policy is too expensive, or that it's difficult to find a life insurance company to insure you because you're much older or you've developed a health condition.
With permanent life insurance, that's not a concern. Coverage is guaranteed for life so long as premium payments are made. Permanent life insurance policies also include a savings component called cash value, which accumulates on a tax-free basis and can be borrowed against or used to pay premiums. Keep in mind that any loans taken against cash value, plus interest, will be deducted from the death benefit your beneficiaries receive.
Cash value can also be beneficial if you want to put premium payments on hold. Cash value can cover payments for a certain time period, or you can opt for a smaller death benefit and use your cash value to make payments for the rest of your life.
If you find that you no longer need life insurance, you can also surrender your policy and collect the cash value. However, if you decide to take the cash surrender value early-on, say within the first several years, there may be very little or no cash value to collect.
Permanent life insurance types
Within the category of permanent life insurance, there are four main types of policies available. Although each operates under the same principles of guaranteed coverage and creation of cash value, there are important distinctions you should know before making a purchase:
- Whole life insurance: Whole life policies are the most straightforward type of permanent life insurance. Whole life policies have fixed premiums that generally do not increase over time. Additionally, whole life has a guaranteed death benefit and guaranteed rate of return on your cash value.
- Universal life insurance: With universal life insurance, you have more flexibility as well as greater risk. After the initial premium has been paid, universal life policies allow you to make smaller payments when money is short and larger payments when extra cash is on hand - although premiums are subject to minimums and maximums outlined in your contract. You also have the ability to increase or decrease the death benefit. However, these features come with a certain level of risk. If administrative expenses increase, mortality assumptions change, insurance company investments underperform, or premium payments are insufficient, it is possible that the policy won't build cash value, your beneficiaries may not receive the entire death benefit, or your policy could lapse.
- Variable life insurance: With variable life insurance, you have the ability to choose where your premium dollars are invested. Premium payments are fixed, but your death benefit and cash value will vary depending on the performance of your investments. This form of permanent life insurance requires policyholders to take on a significant amount of risk.
- Variable universal life insurance: This type of insurance policy combines the flexible premium payments of universal life insurance with the ability to choose where to invest your money. According to the New York Department of Insurance, many variable life insurance policies have a guaranteed minimum death benefit, while variable universal life insurance policies do not. If your investments do not perform as expected, you could lose not only the cash value but also a significant portion of the death benefit.
While these are the main types of permanent life insurance, savvy shoppers may find different variations. Additionally, life insurance companies may offer new or different features. For example, some life insurance companies now offer universal life insurance with secondary guarantees to ensure a policy doesn't lapse, according to the Life and Health Insurance Foundation for Education (LIFE).
As you review life insurance quotes, be sure to carefully consider costs, features and risks. The right policy will be the one that provides the death benefit you need and cash value with a level of risk you feel comfortable with.
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