Permanent Life Insurance

Permanent Life Insurance

is a type of life insurance that provides lifetime coverage as long as you continue to pay premiums.

Unlike term life insurance, which expires after a set period (like 10, 20, or 30 years), permanent life insurance is designed to last for your entire life, offering both a death benefit to your beneficiaries and the potential for building cash value.

Permanent life insurance

Key Features of Permanent Life Insurance:

  1. Lifetime Coverage: As long as you pay the premiums, your policy stays in force for your entire life.
  2. Cash Value: Permanent life insurance has a cash value component that grows over time. This is a savings element within the policy that accumulates tax-deferred and can be borrowed against or withdrawn in the future.
  3. Flexible Premiums (for some types): Some permanent life insurance policies allow you to adjust the amount of premium you pay, especially with options like universal life insurance.

There are different types of permanent life insurance policies, non-participating, participating and Universal. participating and universal life being two of the most common. Below is a breakdown of each.

Participating Life Insurance (Whole Life Insurance)

Participating life insurance (often called whole life insurance) is a type of permanent life insurance that offers fixed premiums, a guaranteed death benefit, and the potential for dividends. Here’s a breakdown of how it works:

Key Features:

  • Fixed Premiums: Your premiums remain constant throughout the life of the policy. This means you know exactly how much you’ll need to pay each year.
  • Guaranteed Death Benefit: As long as you pay your premiums, your beneficiaries are guaranteed a death benefit when you pass away.
  • Cash Value Growth: A portion of the premiums you pay goes into a cash value account, which grows over time. The growth is tax-deferred, meaning you don’t pay taxes on it until you withdraw or borrow against it.
  • Dividends: Participating policies are “participating” in the sense that they are eligible to receive dividends from the insurance company. These dividends are not guaranteed but are typically paid if the company does well financially. You can use the dividends to:
  • Purchase additional insurance (which increases your death benefit)
  • Reduce premiums
  • Take the dividends in cash
  • Leave them to accumulate with interest

Why to choose participating life insurance coverage:

  • Predictable Premiums: Since the premiums are fixed, you don’t have to worry about fluctuations.
  • Dividend Potential: While not guaranteed, the potential to earn dividends adds a benefit for policyholders if the insurer performs well.
  • Lifetime Coverage: You’re covered for your entire life as long as you keep paying the premiums.

 

  1. Universal Life Insurance

Universal Life Insurance (UL) is another type of permanent life insurance that offers flexibility in terms of premiums and death benefits. Unlike whole life, which has fixed premiums, universal life insurance allows for changes in both.

Key Features:

  • Flexible Premiums: You can adjust the amount you pay in premiums over time. This means you can make lower payments if your financial situation changes, or you can pay more if you want to build cash value faster.
  • Flexible Death Benefit: You can also adjust the death benefit (within certain limits), depending on your needs.
  • Cash Value: Similar to whole life, universal life insurance also has a cash value component. However, the growth of the cash value is typically tied to an interest rate set by the insurer (it can vary). The interest is credited to your cash value, and you can borrow against this accumulated amount.

Subtypes of Universal Life Insurance:

  • Indexed Universal Life (IUL): This version ties the cash value growth to a stock market index (like the S&P 500). It provides the potential for higher returns, but the growth is capped, and there are usually no losses if the market performs poorly.
  • Variable Universal Life (VUL): This version allows the cash value to be invested in a variety of securities (stocks, bonds, etc.), which can result in higher returns but also carries more risk. Your cash value (and sometimes death benefit) can fluctuate based on market performance.

 

 

Summary Comparison:

Feature

Participating Life Insurance (Whole Life)

Universal Life Insurance

Premiums

Fixed, predictable

Flexible (can change over time)

Death Benefit

Guaranteed, fixed

Flexible, can be adjusted

Cash Value Growth

Accumulates at a guaranteed rate

Accumulates based on interest or investment returns

Dividends

Potential for dividends (not guaranteed)

No dividends

Flexibility

Low (fixed premiums, fixed death benefit)

High (adjust premiums and death benefit)

Cost

Higher premiums

Can be lower, but can increase with age or cost of insurance

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