Guide to Permanent Life Insurance
Whether you’re a single adult looking to protect your future assets, or you have a family and want to secure their future in case anything happens to you, life insurance is a key investment that every adult needs to consider.
Financial advisors offer a simple solution to help protect your family from risks.
If you want to take out a life insurance policy without having to think about renewing it every year or so, permanent life insurance might be a good option for you. However, that does not mean that permanent life insurance policies are always the best choice .
With that in mind, let’s look at how a permanent life insurance policy works and how one might benefit you.
What is Permanent Life Insurance?
Permanent life insurance is, in some ways, exactly what it sounds like. This kind of policy stays in place for the rest of your life, provided you keep paying the premiums. As with term life insurance policies, you can cancel your policy; however, there may be additional fees if you cancel within a certain period.
There are also different types of permanent life insurance, all of which can affect the size of your premium payments and your term policies.
Whole Life Insurance
Whole life insurance often has a fixed cost.
With whole life insurance, you can either pay your premiums in one lump sum or spread them across a longer period, such as 10–30 years. Some policies even allow you to stretch the payments out until you turn 100, which can be a great option if you’re young but want the benefits of permanent life insurance.
Universal Life Insurance
Universal life insurance is more like a combination of a savings account and a life insurance policy.
With a universal life insurance account, you pay in as much as you want each month. Your premiums are automatically deducted from the money in this account, and any funds that are left over earn a variable interest rate, making it a good way to build cash alongside your life insurance policy.
This type of policy purchase offers more flexibility than others, making it a good option for people whose income varies. However, you should note that the amount of interest that you earn will depend on how well your investments perform.
Burial and Final Expense Insurance
Burial and final expense insurance policies are permanent life policies that are easier to have approved, because they do not require you to undergo a medical exam. However, they typically do not pay out a large death benefit.
If you’re struggling to be approved by a life insurance company, then burial or final expense insurance might be a good option for you. In addition, these life insurance products may be less expensive than other types of permanent life insurance. However, many experts recommend avoiding these products unless they are truly necessary, as other types of life insurance often come with larger amounts of coverage for smaller premiums.
Benefits of Permanent Life Insurance
While you may have previously considered only term life insurance, choosing a permanent life insurance policy can offer a number of benefits.
First , the premiums you pay cover you for your whole lifetime. Unlike term life insurance, in which your premiums only cover the term of your policy, permanent life insurance is still valid for years after you have paid all your premiums.
Because you don’t have to worry about renewing your policy with permanent life insurance, you’re also secure in the knowledge that your beneficiary will receive a payout when you die — after you have paid your premiums, of course, and as long as you don’t surrender your policy.
Unlike term life insurance, permanent life insurance products and services also build cash value for the policyholder. Not only can you take out a tax-free loan against the value of your life insurance policy, but some cash value life insurance products also allow you to withdraw cash to cover medical expenses, tuition, vacations, or for any other reason. This added cash value and death benefit can not only help you enjoy your life but also provide a financially secure future for your beneficiaries.
If you choose a universal life insurance policy, you also have the added benefit of being able to change your coverage throughout the lifetime of the policy. So, if you want to increase your death benefit or lower your premiums because your life circumstances have changed, this kind of permanent life insurance gives you that flexibility.
Drawbacks of Permanent Life Insurance
One of the biggest downsides of permanent life insurance is cost; it is often the most expensive option when it comes to life insurance. Despite the flexibility offered by options like universal or whole life insurance, it can still be too expensive for people on limited budgets.
There are also annual fees associated with permanent life insurance policies, and, if you end up in a position where you can no longer afford your life insurance, the insurance company may charge you a surrender fee if you cancel your policy within a certain period, such as 10 or 20 years.
In addition, your permanent life policy relies your provider remaining in business. Thankfully, however, Canadians are protected by a non-profit called Assuris that protects policy values (not totally, but still to a significant degree)—even if the issuer were to become insolvent. If your life insurance company fails, Assuris will seek to transfer your policies to a solvent life insurance company. Assuris guarantees that you will retain at least 85% of your insurance benefits that you were promised.
Finally, it is worth noting that you may not even be approved for permanent life insurance until you undergo a medical examination, which is rarely a requirement with term life insurance policies.
Who Needs Permanent Life Insurance?
Permanent life insurance is a great option for people looking to pass their wealth onto their dependents or heirs after their death. Given that this type of insurance not only comes with a death benefit but also can have a cash value or include an investment account, it guarantees additional financial security for the policy’s beneficiaries.
However, given that permanent life insurance premiums tend to be more expensive than term premiums, this type of insurance product is best suited to wealthier individuals, particularly given the penalty for surrendering a policy early.
Thus, permanent life insurance is particularly appropriate for parents, older couples, estate owners, or even young, wealthy adults who are prepared to make payments over the long term. Whole or universal life insurance policies, in which the policyholder pays an extra amount to be deposited into a separate savings account, are also a good option for adults who want to save more of their paycheck but don’t want the hassle of having to set up multiple monthly payments.
How Much Life Insurance Do You Need?
How much life insurance coverage you need depends on what you want your beneficiaries to be able to pay for when you die. In addition, if you are on a budget but still want permanent life insurance, reducing your coverage will often reduce your premiums.
If you’re looking to cover the costs of your funeral and burial, a death benefit of $20,000 or less is a reasonable amount of coverage to consider. Your beneficiaries will be secure in the knowledge that they will not have to pay a fortune towards your memorial.
However, if you want to cover multiple dependents, whether or not they have already been born, then coverage of $500,000 or more is a good high-end death benefit. This level of payout will cover the costs of college or university for multiple children, help your adult dependents with a deposit on a home, or even ensure that your heirs have enough money to get by while still making a sizeable donation to charity in your memory.
Takeaway
Permanent life insurance is not a common choice for many people when they consider life insurance, but that doesn’t mean its benefits should be ignored. It’s actually an excellent option for people looking to build financial security for their dependents and for younger adults who can spread payments out over decades to enjoy lower premiums. However, because premiums are often more expensive than with term life insurance, permanent life insurance is not always an option for people on strict budgets.
Frequently Asked Questions About Permanent Life Insurance
Is permanent life insurance a good investment?
Permanent life insurance is a great investment, particularly because many variants act as an investment account to accrue interest on your savings or allow you to borrow money against the policy. In addition, permanent life insurance can help you build a nest egg for your beneficiaries when you pass away, making it a great investment in their future.
Can you cash out permanent life insurance?
Depending on your policy terms, you may be able to cash out permanent life insurance to pay for medical expenses or other life events. However, with these policies, the amount that can be cashed out will be limited by the basic rate outlined in the policy documents. In some cases, any withdrawal may even be counted against the death benefit in the policy.
Some other policies may allow you to surrender the policy to withdraw the cash value, allowing you to access some funds in an emergency. However, this means you will lose the premiums you’ve already paid in and will no longer be covered by life insurance until you take out another policy.
You should also be aware that there may be additional fees associated with cashing out permanent life insurance within a certain period, and almost every provider will charge you for surrendering your insurance policy early.
So, if you have not had your insurance policy for long, it’s best to consider borrowing against the value of your policy, which you can do tax-free. Of course, you will have to pay this amount back, but it can be a good option if your chosen policy doesn’t allow you to cash out and you need emergency access to funds.
Which is better — term or whole life?
This depends on what you’re looking for in a life insurance policy and how much you have to spend on premiums.
Term life insurance is the best available option for policyholders on a budget, as they still offer the lowest premiums on the market. They are a good choice if you want a fixed premium that will not change over the term of your policy and, given that you can take out a policy for up to 30 years, younger adults can lock in lower premiums that will cover them for decades. Some of these policies can even be converted to permanent life insurance policies after a certain period.
However, if you can afford higher premiums, whole life insurance offers significantly more benefits. Not only will these premiums be paying towards a policy that will cover you until your death rather than until renewal, but whole life policies also combine your insurance premiums with a savings account. So, any money paid into your whole life insurance account will accrue interest over time, meaning you can build a nest egg for your beneficiaries or have additional savings ready in case of emergency.
