Common types of permanent life insurance include whole life, guaranteed issue whole life, universal life, and variable life insurance. Each of these permanent life insurance policy types has different features, but all include a cash value account that you can access. Here’s what you need to know about permanent life insurance to decide if one of these policies, and which type, is right for you.
What Is Permanent Life Insurance?
Permanent life insurance is a type of life insurance policy that does not end or terminate after a certain number of years. It covers you for your entire life as long as you make sufficient and timely premium payments. When you die, the life insurance policy will pay a tax-free death benefit to your beneficiary. You can name one or more beneficiaries in the policy to receive the benefit. Permanent life insurance is also known as “cash value life insurance” because it provides an opportunity to build savings through the policy on a tax-deferred basis. When you pay your premium for a permanent life policy, part of the payment you make goes toward the cost of the death benefit, and another part of it goes into a cash-value account. This is necessary because as you age, the cost of insurance increases. The cash value offsets the cost of insurance so that you can have a level premium (in the case of whole life insurance) or a manageable premium for the entirety of the policy. Another perk of the cash value is that you can withdraw money from it or take loans against it once you’ve built up assets in it.
How Does Permanent Life Insurance Work?
Permanent life insurance typically begins with an application. Once you are approved and own a policy, you pay premiums to keep it in force. Although designed to pay a death benefit one day, permanent life insurance is a financial asset while you own it. Each of these phases of a life insurance policy—application, ownership, and payment of death benefit—has unique characteristics and considerations.
Application
To apply for a life insurance policy, you need to submit an application for the amount of coverage you want, which the insurance company uses to determine your eligibility for the policy and the premium. Submitting a premium payment with an application (sometimes called a binder) would provide you with temporary coverage while still in the underwriting process. If the person that is being insured were to pass while still during the underwriting process and it is determined that they would’ve been approved, the death benefit would be paid to the beneficiaries. Additionally, paying the premium for conditional coverage can also help save on premiums by locking in the current insurance age. The insurance age easily changes during the underwriting process as this process can take several months for individuals that have visited medical specialists in the past. Applying for life insurance may (or may not) include a medical exam, but typically requires your and your family’s medical history. Whether a medical exam is required is based on the company’s underwriting criteria. For example, you may be able to get a medically underwritten policy and not have an exam if the insurance company uses a process called accelerated underwriting. Other no-exam policies offer simplified underwriting (which typically consists of a simple questionnaire), and some, like guaranteed issue policies, have no questions at all. In addition to collecting medical information, the insurer may ask about your occupation, your habits, the reason you want coverage, and other factors it deems necessary to assess the company’s risk. It may also request to run your credit, and check your background and driving history.
Ownership
Once your application is approved, the insurer will confirm the coverage and premium. Before issue, you may elect to add various riders, or features, to your policy, such as living benefits and waivers of premium for disability. Riders are optional benefits that increase the premium. When you have finalized your options, you will pay the agreed-upon premium. Part of that premium payment goes toward the cost of the death benefit. Another portion goes toward the policy’s cash value and any additional riders or features you purchased. If you have investment options (as in a variable life insurance policy), the amount going into the cash value will be divided among the investment or fixed accounts you select. Any fees or charges for the policy are taken out of the cash value or the premiums. You can access the cash value via a policy loan or withdrawal. And if you purchased optional riders, such as critical illness, terminal illness, disability, or chronic illness, you can access part of the death benefit (also knows as the face value) “early,” under certain circumstances, as an accelerated death benefit.
Payment of the Death Benefit
Payment of the death benefit happens when you die. Your beneficiary (or beneficiaries) will receive the full value of the death benefit, whether you die five years into the policy or at the end of a long life. If your policy has a cash value, your beneficiary will usually not get the death benefit and the cash value. However, some policies are designed to pay out both the face value and the accumulated cash value. If this feature is important to you, be sure to discuss it with an insurance agent before you purchase a policy. Most, if not all, life policies have a two-year contestability period. If you die within the first two years after the policy is issued, the insurer can review your application for material errors and potentially deny your claim. A claim for death as a result of suicide may also be denied during the contestability period.
Types of Permanent Life Insurance
If you decide that permanent life insurance is the right choice for your needs, consider which type of permanent life insurance is most suitable.
Whole Life Insurance
Whole life insurance provides a guaranteed death benefit, a level premium (a premium that does not increase over time), and the ability to build cash values. With “participating” whole life policies (available with some mutual insurance companies), you can earn annual dividends, which add to the policy’s value through features like paid-up additions. If premiums aren’t paid, the policy will lapse.
Universal Life Insurance
With a universal life insurance policy, you can adjust your premium payments and change the death benefit (although you may have to undergo medical underwriting to increase it). Policies also offer a minimum guaranteed rate of interest on the cash value. If you don’t make premium payments, or payments aren’t sufficient, the policy will draw down the cash value to cover costs, and could eventually lapse.
Variable Life Insurance
Depending on policy type, premiums may be fixed or flexible, and there may be a minimum death benefit guarantee. A key feature of variable life insurance is the ability to invest the cash value, usually in various mutual funds, via subaccounts in the policy. Because of the investment features, policy fees and costs are higher than for non-variable life policies. This type of policy has a higher risk of losing money or lapsing when the market does not perform well, or the premiums are not sufficient to cover the policy charges.
Guaranteed Issue Life Insurance
Guaranteed issue insurance is permanent life insurance that does not require any medical underwriting. Commonly referred to as final expense or burial insurance, it typically offers minimum coverage (usually under $25,000 and sometimes up to $50,000) and is more expensive relative to policies with medical underwriting.
Permanent Life Insurance vs. Term Life Insurance
While permanent life insurance provides lifetime protection, term life insurance can cover you for as little as one year and up to 30 or 40 years. Unlike permanent policies, term policies do not typically include a cash value. If you die during the term, the death benefit is paid to the beneficiary, but once the term is up, you no longer have coverage. Since it provides coverage for a limited period of time and does not accumulate a cash value, term life insurance usually has less expensive premiums than permanent life insurance.
You want to provide a tax-free inheritance for your children. You want lifetime coverage. You want to lock in insurance coverage while you are young and in good health. You want to use life insurance as a tool to build tax-deferred savings—as a safety net, for retirement income, or to help finance major costs like a child’s education or a down payment on a home. You wish to make a large charitable gift when you die. You want to supplement other life insurance (a term policy or life insurance through work) with a permanent policy.
If you decide to purchase life insurance, you’re in good company: 57% of Americans have life insurance to help supplement retirement income; 66% have it to transfer wealth; 84% have life insurance to help pay for burial costs and final expenses, and 62% have it to replace lost income or wages.
