If you are buying life insurance and decide to buy a permanent life insurance policy, there are many types of insurance policies to choose from. Permanent life insurance policies combine life insurance for the rest of your life. Here are some benefits of permanent life insurance
There is an old saying:
“The only guarantees in life are death and taxes.”
So if you could financially protect yourself against one, wouldn’t it be smart to do so? Permanent life insurance is a type of life insurance that literally protects you until the day of your death, no matter how old you are. You cannot survive your life insurance policy.
However, within the scope of permanent life insurance, there are different types, with different levels of guarantees. Consider what your situation is, what your needs are, and what will be the most suitable and profitable for you in the long term. The decisions you make with permanent insurance may be the ones you will need to be sure that they will last more than half a century or more.
Permanent Life Insurance
The first policies sold when life insurance was in its infancy were full -life or permanent products. Death benefit amounts were only a few thousand because it was almost 200 years ago, and only very prominent figures and businessmen covered their lives, initially. Obviously, as the awareness behind the issue grew and the products evolved to meet many more needs of families and individuals, this changed.
But one thing that never changed was the availability of a permanent life insurance policy. It only makes sense that a life insurance product is available to cover your entire life, regardless of age or circumstances.
Permanent insurance now incorporates the umbrella that has several different types of permanent insurance underneath, each with its own set of distinct advantages and disadvantages. Here are a few:
- Guaranteed universal life insurance (GUL)
- Indexed Universal Life Insurance (IUL)
- Universal Survival Life Insurance (SVUL)
- Whole life insurance (WL)
- Survival Whole Life Insurance (SWL)
But before we break down exactly what the differences are between each, let’s talk about some of the benefits that a permanent life insurance policy could bring you.
BENEFITS OF PURCHASING PERMANENT LIFE INSURANCE
Perhaps one of the biggest unspoken benefits of a permanent life insurance policy is the control you have. Although more complex than a term life insurance policy, it lends itself to many different ways of using the policy both in life and in death.
As long as you live, you can count on level premiums, level (or increasing) death benefits, cash growth in a tax-advantageous way, access to that cash when needed or anticipated, additional dividends, or even growth through the stock markets, and more. There are numerous situations in which a universal or comprehensive life insurance policy can work where a term life insurance policy simply cannot, largely due to the cash value aspects of the policy as well as its permanent nature.
That said, you will pay a much higher premium for every thousand dollars of coverage because you must pay these extra benefits. In the long term, with sufficient growth within the permanent life insurance policy itself, the benefits could exceed those premiums, but only if they are used properly. A poorly managed permanent life insurance policy or an underfunded permanent life insurance policy will become useless and a waste of premium.
With term life insurance, your premiums will increase at some future point in the contract, described at the beginning of the policy. With permanent insurance, you can expect the same premium, month after month, as long as you have a life insurance policy. In certain circumstances, you may even have enough annual growth within your life insurance policy to fully offset premiums, which means you can simply stop paying and continue to pay forever.
You also have the flexibility of premiums, if needed. If you already have enough cash under the policy, you can have the policy make payments for you temporarily, for example, if you lose your income or skip a payment. This will earn loan interest, so use caution when using this option.
Level Death Benefits
When you buy a permanent life insurance policy, you want the promise of payment and you want guarantees of how much it will be. Fortunately, death benefits never decrease below the stated policy of death benefit in question and, in fact, can increase.
There are life insurance policies, such as the declining term product used to protect mortgages, where the payment is reduced along with the remaining principal balance.
However, universal life insurance policies will never decrease, and certain total life insurance policies will increase over time due to the amount of cash growth within the contract. However, if cash is taken, the death benefit would be reduced by the amount outstanding if it was approved before the loan was repaid.
With term life insurance, you are paying the death benefit, nothing more. With a permanent, it has the ability to increase cash within the life insurance policy itself and grows tax-free.
A portion of the premiums you pay goes to the cash “deposit” inside, as well as interest and dividends credited by the insurance company. As this cash grows, it is not taxable, and you have the ability to access this cash without tax if you do so on a loan. You can also access funds before age 59 1/2, where you would otherwise be penalized if you came from a 401 (k) or IRA account.
Cash growth can also come in the form of mutual funds or index funds through universal indexed life insurance policies. The same rules apply to both tax deferment and access to cash before age 59½, all because the premiums paid are after-tax dollars. In this way, they can act similar to a Roth IRA with the added benefits of leveraging death benefits.
As mentioned above, you can access the growing cash from the life insurance policy if it is permanent. But it is not exactly like a basic savings account, and you must have a strict purpose to touch the money inside.
There are different ways to get to the funds, either through loans or by giving up the life insurance policy, but be aware of the consequences of each. With a loan, the interest accumulates against the policy and its cash and must be paid or the interest will continue to accumulate. With delivery, you may be taxable because you are also delivering the tax shelter provided by the insurance policy.
If properly funded, you can create a life insurance policy strictly so that you have the ability to access the cash value for the past few years and use it as a supplemental income. It may also be appropriate to take out a loan on your policy if the interest you will pay inside is less than you could get to obtain private financing from a bank or other lender. Just remember, you’ll want to pay it back quickly to avoid increasing long-term interest for years to come.
Modified Endowment Contracts
With these added cash benefits, understand the limitations. If too much cash is injected into the life insurance policy, on purpose or not, over a continuous period of seven years, the life insurance contract can become a modified endowment contract (MEC). This changes the taxes on the funds within.
There is only an amount of cash on hand that a policy can hold, as long as there is enough death benefit as well. This helps prevent someone from buying a very small whole life insurance policy and throwing large sums of money to avoid proper taxes. Once a life insurance policy becomes a MEC, it cannot be undone. Thus, any life insurance policy that is overfunded or used to increase cash more aggressively must be carefully monitored by a specialized agent or registered representative.
There are circumstances when creating a MEC from the start is very helpful, such as estate planning, but consult a tax planning professional or estate attorney before doing so.
DIFFERENCES IN THE TYPES OF PERMANENT LIFE INSURANCE POLICY
Fortunately, you have a better understanding of the different benefits and limitations of permanent life insurance policies in general, so let’s quickly go through each specific type so you can have a deeper understanding of how each type can meet a different need. Obviously, there are many ways to use each of them, but suppose we are discussing general terms and examples.
Guaranteed universal life insurance
The group’s most basic permanent life insurance, a guaranteed universal life insurance policy is one of the cheapest ways to purchase a policy for a guaranteed death benefit.
Cheaper than a whole life insurance policy, a GUL can provide a death benefit up to age 121 with tier premiums and a tier death benefit, with guarantees attached to the policy as long as the premiums are kept current. Access to cash must be limited or not used at all, because cash growth in the early stages of the policy is used to offset the rising costs of the death benefit in subsequent years.
Best use: low cost per thousand for permanent life insurance.
Indexed universal life insurance
An IUL is a standard universal life insurance policy through the death benefit, but internal growth is linked, in part, to different stock market indices. The indexed universal life insurance policy is configured to take advantage of the upside potential in the markets while limiting downside risks. There are some guarantees attached to the life insurance policy, but this is one of the most complex types of policy to fully understand.
They have been under fire in recent years because an untrained and specifically qualified agent by FINRA (the legislative body for those who sell policies with variable funds) can still sell them.
Best use: permanent insurance with cash growth potential and, at the same time, limit risk.
Universal survival life insurance
A less widely used and reserved permanent rate for the senior life insurance market, a universal survival life insurance policy is one of only two types of permanent death benefit that extends throughout the life to two people, not one.
This is key because, for estate planning purposes, a death benefit is not required until both parties are deceased. This allows the estate to pay a lower cost per thousand, maintaining the necessary payment for the time that is necessary. This type is very useful for a small number of people and you should include a tax professional before submitting an application to make sure it meets your needs in the right way.
Best Use: Estate plans where death benefits will be needed regardless of age.
Whole life insurance
The type of life insurance policy founded, whole life insurance is the original method for consumers and business people to buy a death benefit that cannot survive. With attached guarantees, access to cash if needed, and stable or increasing death benefits, this type is one of the most common for simple but permanent needs. Although it has received competition in many ways, from opinion leaders to “buy term and invest the difference” to those who use GUL, it is still a staple for many insurance companies, that is, mutual giants.
Best use: permanent insurance with the most inherent guarantees.
Survival whole life insurance
Like Universal Survival Life Insurance, a whole survival life insurance policy spans two lives, not one. The use is similar to universal survival life insurance in that it applies to some situations, with estate planning being the most important. Survival whole life insurance has the added benefit of potentially increasing the death benefit over a large number of years, providing a great help in compensating for inflation and devaluation of the payment when necessary.
Best use: permanent insurance needs for an estate.
CHOOSE THE RIGHT THING FOR YOU
As with any life insurance policy, choosing the best permanent insurance is largely tied to matching the policy to need. If you need cheap but durable insurance, a guaranteed universal life insurance policy will be more affordable. If you are looking to get cashback later, using a survival life insurance policy is less plausible. Talking to a specialist permanent insurance agent is very necessary due to the wide variations in the different types.