Permanent Insurance
Permanent
insurance provides lifelong protection, and the ability to accumulate
cash value on a tax-deferred basis. Unlike term insurance, a permanent
insurance policy will remain in force for as long as you continue to
pay your premiums. Because these policies are designed and priced for
you to keep over a long period of time, this may be the wrong type of
insurance for you if you don't have a long-term need for life insurance
coverage.
Why
would someone need coverage for an extended period of time? Because
contrary to what a lot of people think, the need for life insurance
often persists long after the kids have graduated college or the
mortgage has been paid off. If you died the day after your youngest
child graduated from college, your spouse would still be faced with
daily living expenses. And what if your spouse outlives you by 10, 20
or even 30 years, which is certainly possible today. Would your
financial plan, without life insurance, enable your spouse to maintain
the lifestyle you worked so hard to achieve? And would you be able to
pass on something to your children or grandchildren?
Cash Value – A Key Feature
Another
key characteristic of permanent insurance is a feature known as cash
value or cash-surrender value. In fact, permanent insurance is often
referred to as cash-value insurance because these types of policies can
build cash value over time, as well as provide a death benefit to your
beneficiaries.
Cash values, which accumulate on a tax-deferred
basis just like assets in most retirement and tuition savings plans,
can be used in the future for any purpose you wish. If you like, you
can borrow cash value for a down payment on a home, to help pay for
your children's education or to provide income for your retirement.
When you borrow money from a permanent insurance policy, you're using
the policy's cash value as collateral and the borrowing rates tend to
be relatively low. And unlike loans from most financial institutions,
the loan is not dependent on credit checks or other restrictions. You
ultimately must repay any loan with interest or your beneficiaries will
receive a reduced death benefit and cash-surrender value.
If
you need or want to stop paying premiums, you can use the cash value to
continue your current insurance protection for a specified time or to
provide a lesser amount of death benefit protection covering you for
your lifetime. If you decide to stop paying premiums and surrender your
policy, the guaranteed policy values are yours. Just know that if you
surrender your policy in the early years, there may be little or no
cash value.
Cash Value vs. Face Amount
With
all types of permanent policies, the cash value of a policy is
different from the policy's face amount. The face amount is the money
that will be paid at death or policy maturity (most permanent policies
typically "mature" around age 100). Cash value is the amount available
if you surrender a policy before its maturity or your death. Moreover,
the cash value may be affected by your insurance company's financial
results or experience, which can be influenced by mortality rates,
expenses, and investment earnings.
"Permanent insurance" is
really a catchall phrase for a wide variety of life insurance products
that contain the cash-value feature. Within this class of life
insurance, there are a multitude of different products. Here we list
the most common ones.
Whole Life or Ordinary Life
If
you're the kind of person who likes predictability over time, Whole
Life insurance might be right for you. It provides you with the
certainty of a guaranteed amount of death benefit and a guaranteed rate
of return on your cash values. And you'll have a level premium that is
guaranteed to never increase for life.
Another valuable benefit
of a participating Whole Life policy is the opportunity to earn
dividends. While your policy's guarantees provide you with a minimum
death benefit and cash value, dividends give you the opportunity to
receive an enhanced death benefit and cash value growth. Dividends are
a way for the company to share part of its favorable results with
policyholders. When you purchase a participating policy, it is expected
that you will receive dividends after the second policy year - but they
are not guaranteed. Dividends, if left in the policy, can provide an
offset (and more) to the eroding effects of inflation on your coverage
amount.
Universal Life
Unlike
Whole Life and Variable Life where you pay fixed premiums, Universal
Life offers adjustable premiums that give you the option to make higher
premium payments when you have extra cash on hand or lower ones when
money is tight.
Universal Life allows you, after your initial
payment, to pay premiums at any time, in virtually any amount, subject
to certain minimums and maximums. You also can reduce or increase the
death benefit more easily than under a traditional Whole Life policy.
Most
Universal Life policies will also provide a guaranteed rate of return
on your cash values, with one important exception. It is possible that
you will not accumulate any cash value if any, or all, of the following
circumstances occur: administrative expenses increase, mortality
assumptions are changed, the insurance company's investment portfolio
underperforms, premium payments are insufficient.
In recent
years, there’s been considerable interest in what’s commonly referred
to as Universal Life with Secondary Guarantees (also known as a
“No-Lapse Guarantee”). With an ordinary Universal Life product, the
policy could lapse under certain circumstances (e.g., interest rates
fall below projections, insurance costs or administrative expenses
rise, etc). When you buy a policy with a “secondary guarantee,” you’re
guaranteed that the policy won’t lapse even if the above factors come
to pass.
One of the most attractive things about
Universal Life
policies with Secondary Guarantees is that they provide lifelong
coverage at rates that can be considerably lower than other forms of
permanent insurance. That’s one of the main reasons why these policies
have become so popular for estate planning purposes. If you have a
federal estate tax liability (in 2008, estates valued at over $2
million are taxed), your main concern is liquidity at death. When you
die, you don’t want your heirs to have to hastily sell off assets in
order to pay estate taxes. With a Universal Life policy with Secondary
Guarantees, the death benefit is guaranteed for life and you have the
flexibility of adjusting your premiums, a valuable feature since estate
tax rates and exclusion amounts keep changing from year to year.