A permanent life insurance policy offers life insurance coverage. Whether you live to be 100 years old or die tomorrow, the policy will still pay a death benefit. Additionally, there is a savings component that will increase tax-deferred and potentially expand significantly over time.
Due to the savings component, permanent insurance premiums are typically more expensive than term insurance. On the other hand, a permanent policy's premium never changes, but the cost of a term policy's renewal can increase significantly.
Permanent insurance policies come in various forms, including whole (ordinary) life, universal life, variable life, and variable/universal life. The cash value of a permanent insurance policy is different from the face value. The money that will be paid upon death is known as the face amount.
The quantity of money that is yours is called the cash value. The money you save can be put to use in a variety of ways. You may, for example, borrow money against it or surrender the policy before you pass away to receive the accrued savings.
Characteristics of a permanent policy:
When you buy the policy, you can fix the premiums. If you get permanent coverage, your premium will stay the same as you get older or if your health changes.
Cash savings will be accumulated via the policy.
Depending on the rules, you might be allowed to withdraw some of the money. You may also choose from the following:
Pay premiums using the cash value. You can pause or lower your premium payments if unplanned expenses arise. If enough money is accumulated, the policy's cash value may be applied toward the premium payment to maintain your existing insurance coverage.
Use the cash worth of your life insurance policy as security to borrow money from the insurance provider. Like other loans, you will eventually have to pay interest to the insurer. If not, the insurance might expire or the death benefit paid to your beneficiaries will be less.
The loan, however, is not subject to credit checks or other limitations, unlike loans from most financial institutions.
Permanent Life Insurance Cash Value
A portion of each permanent life insurance premium payment is deposited into a cash value account, which increases at the rate set forth in the policy. You can borrow money from the insurer and utilize the cash value as collateral once it reaches a specified amount.
Since the insurer has the funds to support the loan, there are no credit checks or other requirements for policy loans, and they are not subject to time constraints for repayment. On policy loans, however, you pay a little interest rate.
Additionally, your insurance will lapse, and you risk losing your coverage if the loan balance plus accrued interest is greater than the cash value. Last but not least, if you pass away before repaying the loan, the loan balance will be subtracted from the death benefit your beneficiaries would get.
You may also use the cash value of some permanent life insurance plans to pay premiums. This choice is typically only offered with universal life insurance plans and carries some risk because your policy will expire if the cash value drops to zero.
Permanent life insurance provides security thanks to its cash value. You would receive it back if you ever decided to cancel your policy and gave the insurer your money instead. There are surrender fees during the first several years of coverage, so you wouldn't obtain the whole amount of accumulated cash value. You could recuperate some of the money you paid, though.
However, keep in mind that the cash value of a permanent life insurance policy is distinct from the death benefit, so in most cases, your beneficiaries won't get any of the cash value when you pass away.
Final Expense Protection
There are specific whole life insurance plans that are inexpensive and are promoted as final expense insurance or burial insurance. However, the death benefits on these are frequently capped at less than $50,000, making the cost per dollar of insurance relatively high.
Because they often don't require a medical exam or are "assured acceptance," you can't be turned down, and final expense insurance policies are costly. The coverage may be quite expensive because the insurer is taking on a significantly more significant risk.
Maturity Dates Are an Exception to the Rule
Permanent life insurance typically offers coverage for the duration of your life. But policies are frequently offered with a maturity date that depends on your age. The insurer will generally pay you a sum of money and coverage will end if the policy reaches its maturity date while you are still alive. The amount can be either the policy's death benefit, its cash value, or a fixed amount.
Typically, whole life insurance contracts are designed to expire when you are 100 years old, at which time the cash value and death benefit should be equal. Conversely, the maturity age of universal life insurance contracts is frequently stated in the policy itself. The fact that some universal life insurance plans were once marketed with 85-year maturity dates, this has produced problems for some policyholders.
Policyholders who lived past the policy's maturity date would no longer be covered and would receive minimal monetary value because the money had been utilised to pay premiums. Now that you may typically pick a maturity date as high as age 121 when you get coverage, this is less of a problem.
Permanent Life Insurance Tax Benefits
Term and permanent life insurance death benefits are tax-free to your beneficiaries. However, there are a few tax advantages with permanent life insurance that aren't present with term coverage:
Similar to earnings in a retirement account, permanent life insurance plans' cash values increase tax-deferred.
There are no income taxes if you receive dividends or give up your insurance coverage unless the amount you receive exceeds what you paid in premiums.
As long as the policy is still in force (i.e., the total of the outstanding loan plus interest does not exceed the cash value), there are no taxes if you take out a policy loan. This is significant in the context of policy loans since you aren't actually compelled to pay the money back to the insurer, even though you aren't taxed on other sorts of loans.