What are the Types of Permanent Insurance?
1. Whole Life Insurance or Ordinary Life Insurance
This has been the most common type of permanent life insurance. A whole life policy is kept in force for a person’s whole life as long as the premiums are paid. All Whole Life policies also build up cash value.(Term Life Insurance policies do not)
The main difference between whole life policies is the dividend. This can vary depending on how well the investments and other business criteria of the insurance company are doing. If the company is doing well and the policies are not experiencing a higher mortality than projected, values are paid back to the policyholder in the form of dividends. Policyholders can use the cash from dividends in many valuable ways (ex. to lower premiums, to purchase more insurance or to pay for term insurance).
2. Universal Life or Adjustable Life
This variation of permanent insurance allows you, after your initial payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. You also can reduce or increase the amount of the death benefit more easily than under a traditional whole life policy. (To increase your death benefit, you usually will be required to furnish the insurance company with satisfactory evidence of your continued good health.)(Decreasing does not lower premiums.)
3. Variable Life
This type of permanent policy provides death benefits and cash values that vary with the performance of an underlying portfolio of investments held in a separate account. You can choose to allocate your premiums among a variety of investments which offer varying degrees of risk and reward. You will receive a prospectus in conjunction with the sale of a variable product.
The cash value of a variable life policy is not guaranteed*, and the policyholder bears that risk. However, by choosing among the available fund options, the policyholder can create an asset allocation that meets his or her objectives and risk tolerance. Good investment performance will lead to higher cash values and death benefits. On the other hand, poor investment performance will lead to reduced cash values and death benefits.
Some policies guarantee* that death benefits cannot fall below a minimum level. There are both universal life and whole life versions of variable life.
Advantages and Disadvantages of Permanent Insurance
Advantages
As long as the necessary premiums are paid, protection is guaranteed for your entire life or to a specific age / maturity.
Premium costs can be fixed or flexible to meet personal financial needs.(Loans, withdrawals and other transactions may affect the premiums required)
Policy accumulates a cash value that grows on a tax-deferred basis that you can borrow against. (Loans must be paid back with interest or your beneficiaries will receive a reduced death benefit.) You can borrow against the policy’s cash surrender value to pay premiums or use the cash surrender value to provide paid-up insurance.
The policy’s cash surrender value can be surrendered — in total or in part — for cash or converted into an annuity. (An annuity is an insurance product that provides an income for a person’s life-time or for a specific period of time.)
Disadvantages
Required premium levels may make it hard to buy enough protection.
It may be more costly than term insurance if you don’t keep it long enough.
Permanent Policy – Points to Consider
- Are the premiums within your budget? Be sure you want to spend the money for this type of long-term coverage.
- Can I commit to these premiums over the long term?
If you don’t plan to keep the product for many years, consider another type of policy.
Cashing in a permanent policy after only a couple of years can be a costly way to get insurance protection for a short term.
