Permanent Life Insurance – Explained

Watch Sun Life explainer video – What is permanent life insurance? (example of Permanent life)

Permanent insurance provides lifelong protection as well as the ability to build up cash value tax-free. A permanent insurance coverage, unlike term insurance, will stay in existence as long as you continue to pay your premiums. Because these plans are structured and priced to be kept for a long time, they may not be the best sort of life insurance for you if you don’t have a long-term need for coverage.

Why would someone require coverage for such a long time? Because, contrary to popular belief, life insurance is often required long after the children have graduated from college or the mortgage has been paid off. Your spouse would still be faced with everyday living expenditures if you died the day after your youngest child graduated from college. What if your spouse outlives you by ten, twenty, or even thirty years, as is now possible? Would your financial plan allow your spouse to continue the lifestyle you fought so hard to attain if you didn’t have life insurance? And, more importantly, would you be able to pass something down to your children or grandchildren?

The following are some of the advantages of permanent life insurance:

Coverage for the rest of your life. Permanent life insurance, as the name implies, insures you for the rest of your life as long as you pay your premiums. Many people find it comforting to know that they will always be covered.

The advantages of living are numerous. Permanent life insurance has the advantage of accumulating cash value over time, which grows tax-deferred, exactly like assets in most retirement and college savings programs. The funds can be used for anything in the future, including major life events like a down payment on a home, college tuition, or retirement. (Just keep in mind that if you don’t pay back the cash value, the death benefit will be reduced.)

There are numerous options. Permanent life insurance comes in a variety of forms. Some provide a fixed rate of return, while others allow you to mix and match investments for a variable rate of return. Others, on the other hand, require you to pay fixed premiums, while others allow you to adjust the amount dependent on your financial situation. Others let you to skip premium payments and gradually increase or reduce your coverage level.

One of the most important features is the cash value.
A component known as cash value or cash-surrender value is another important feature of perpetual insurance. Permanent insurance is also known as cash-value insurance because these policies can accumulate cash value over time while also paying out a death benefit to your beneficiaries.

Cash values, which grow tax-deferred like assets in most retirement and tuition savings plans, can be utilized for whatever you want in the future. You can borrow cash value for a down payment on a home, to assist pay for your children’s education, or to supplement your retirement income if you like.

When you borrow money from a permanent insurance policy, you use the cash value of the policy as security, and the borrowing rates are often low. The loan is also not subject to credit checks or other restrictions, unlike most financial institution loans. Your beneficiaries will receive a decreased death benefit and cash surrender value if you do not repay any loan with interest.
If you need or choose to stop paying premiums, you can use the cash value to keep your current insurance coverage for a set period of time or to give a lower level of death benefit coverage for the rest of your life. The assured policy values are yours if you decide to stop paying premiums and surrender your policy. Just keep in mind that if you surrender your policy early in its life, it may have little or no financial value.

Face Amount vs. Cash Value
The cash value of a permanent policy differs from the policy’s face amount in all types of permanent policies. The face amount refers to the amount of money that will be paid out upon death or policy maturity (most permanent policies “mature” at the age of 100). The amount available if you surrender a policy before it matures or before you die is known as cash value. Furthermore, the cash value of your policy may be determined by the financial performance or experience of your insurance business, which can be influenced by mortality rates, expenses, and investment earnings.

The term “permanent insurance” refers to a wide range of life insurance plans that include a cash-value feature. There are numerous products available in this category of life insurance. The most prevalent ones are listed below.

Whole Life (or Ordinary Life) Insurance

Whole life insurance may be ideal for you if you prefer predictability throughout time. It ensures that you will receive a guaranteed death benefit and a guaranteed rate of return on your cash assets. You’ll also have a fixed premium that won’t change for the rest of your life.

The ability to generate dividends is another significant feature of a participating whole life insurance. While your policy’s guarantees ensure that you receive a minimum death benefit and cash value, dividends allow you to receive a higher death benefit and build your cash value. Dividends are a mechanism for the company to distribute a portion of its profits to policyholders.

It is expected that you would get dividends after the second policy year when you buy a participating policy, but this is not guaranteed. Dividends can provide an offset (and more) to the eroding effects of inflation on your coverage amount if they are left in the policy.

Variable Life

Variable life insurance is sold through a prospectus and provides death payments and cash values that fluctuate with the success of underlying investment options. You can invest your premiums in a variety of ways, each with a different level of risk and reward: stocks, bonds, a combination of the two, or a fixed account that guarantees both interest and principle.

This form of insurance is for persons who are willing to take on financial risk in order to increase their profits. You’re shifting a lot of the investment risk from the insurance company to yourself with Variable Life. Good investment performance could result in increased cash values and, eventually, death benefits. Cash values and death benefits would both decrease if the specified investments performed badly.

Life Is Universal

Unlike whole life and variable life, which have set rates, universal life has adjustable premiums, allowing you to pay higher premiums when you have additional cash on hand or lower premiums when you are short on cash.

After your initial payment, universal life allows you to pay premiums at any time and in virtually any amount, subject to certain minimums and maximums. In comparison to a standard whole life policy, you can easily reduce or enhance the death benefit.

With one notable exception, most universal life policies will also provide a guaranteed rate of return on your cash values. If any, or all, of the following events occur, it is possible that you will not accumulate any financial value: Administrative costs rise, mortality assumptions alter, the investment portfolio of the insurance firm underperforms, and premium payments are insufficient.

There’s also what’s known as universal life with secondary guarantees (sometimes called a “no-lapse guarantee”). Under the case of a standard universal life policy, the policy may expire in specific circumstances (e.g., interest rates fall below projections, insurance costs or administrative expenses rise, etc). When you purchase a policy with a “secondary guarantee,” you may rest assured that the coverage will not lapse even if the aforementioned events occur.

One of the most appealing features of universal life plans with secondary guarantees is that they provide everlasting coverage at rates that are often cheaper than those of other permanent insurance products. One of the primary reasons these policies are employed for estate planning is because of this. If you owe federal estate taxes, your primary concern is liquidity after you pass away. You don’t want your heirs to have to sell assets quickly to pay estate taxes after you die. The death benefit is guaranteed for life with a universal life policy with secondary guarantees, and you have the ability to alter your premiums, which is a useful feature since inheritance tax rates and exclusion amounts fluctuate from year to year.

Universal Life Variable
Variable Universal Life insurance is a permanent life insurance policy with a flexible premium that allows you to allocate premium funds to a choice of investment possibilities with varying degrees of risk and reward. These policies are a wonderful option for those who want the most flexibility.

If your insurance needs vary over time, Variable Universal Life often allows you to increase or decrease the amount of coverage you have. You can also boost the policy’s cash value by making a lump-sum payment. (The maximum lump-sum payout is limited by IRS rules.) In addition, if you have an emergency and are short on funds, you may be able to skip a regular payment and allow the policy’s accrued cash value cover the costs. Keep in mind that you’ll still have to pay for insurance and administrative costs.

Your long-term financial goals and risk tolerance levels are likely to alter as your insurance needs change. Variable Universal Life gives you the freedom to move money across investment divisions tax-free. As a result, you have the ability to make decisions based on your needs rather than tax consequences.