Permanent Life Insurance offers the potential for lifetime protection and can also build cash value, depending on the type of policy. There are a few different kinds of permanent life insurance, each equipped with its own benefits. The overall upside to purchasing permanent life insurance is that, although it is generally more expensive, it has the potential to accumulate cash as well as offer extended security and peace of mind to the family.
Permanent life insurance is life insurance that remains in force until the policy matures unless the owner fails to pay the premium when due. The policy cannot be canceled by the insurer for any reason except fraud in the application, and that cancellation must occur within a period of time defined by law (usually two years). Permanent insurance builds a cash value that reduces the amount at risk to the insurance company and thus the insurance expense over time. The owner can access the money in the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and receiving the surrender value. However, withdrawals and loans will reduce policy cash values and the death benefit and may have tax consequences.
There are many different kinds of Permanent Life Insurance policies; read on to learn more about each specific kind of Permanent Life Insurance policy offered by Diverse Financial.
Whole life insurance offers a level premium and a cash value table included in the policy guaranteed by the company. The primary advantages of Whole Life Insurance policies are a guaranteed death benefit, a guaranteed cash value, fixed annual premiums, and mortality and expense charges that will not reduce the cash value shown in the policy. The primary disadvantages of Whole Life Insurance policies are the inflexibility of the premium and the fact that the internal rate of return in the policy may not be competitive with other savings alternatives. Also, the cash values are generally kept by the insurance company at the time of death, the death benefit is often the only payout received by the beneficiaries. Riders are available that can allow one to increase the death benefit by paying additional premium. The death benefit can also be increased through the use of policy dividends. Dividends cannot be guaranteed and may be higher or lower than historical rates over time. Premiums are much higher than term insurance in the short-term, but cumulative premiums are roughly equal if policies are kept in force until average life expectancy.
Universal Life Insurance is a relatively new insurance product intended to provide permanent insurance coverage with greater flexibility in premium payment and the potential for a higher internal rate of return. There are several types of universal life insurance policies which include “interest sensitive” (also known as “traditional fixed universal life insurance”), variable universal life insurance, and equity indexed universal life insurance.
A universal life insurance policy includes a cash account. Premiums increase the cash account. Interest is paid within the policy on the account at a rate specified by the company. Mortality charges and administrative costs are then charged against the cash account. The surrender value of the policy is the amount remaining in the cash account less applicable surrender charges, if any.
Universal life insurance addresses the perceived disadvantages of whole life insurance. Premiums are flexible. Depending on how interest is credited, the internal rate of return can be higher because it moves with prevailing interest rates or the financial markets. Mortality costs and administrative charges are known and cash value may be considered more easily attainable because the owner can discontinue premiums if the cash value allows it. And universal life has a more flexible death benefit because the owner can select one of two death benefit options, Option A and Option B.
Option A pays the face amount at death as it’s designed to have the cash value equal the death benefit at maturity (usually at age 95 or 100). With each premium payment, the policy owner is reducing the cost of insurance until the cash value reaches the face amount upon maturity.
Option B pays the face amount plus the cash value, as it’s designed to increase the net death benefit as cash values accumulate. Option B offers the benefit of an increasing death benefit every year that the policy stays in force. The drawback to option B is that because the cash value is accumulated “on top of” the death benefit, the cost of insurance never decreases as premium payments are made. Thus, as the insured gets older, the policy owner is faced with an ever increasing cost of insurance (it costs more money to provide the same initial face amount of insurance as the insured gets older).
