Permanent Life Insurance
Note: Any reference to the word guarantee is based on the claims paying ability of the underlying insurance company.
Permanent life insurance provides lifelong protection and is known by a variety of names. These policies are designed and priced for you to keep over a long period of time. If you don’t intend to keep the policy for the long term, it could be the wrong type of insurance for you.
Most permanent policies including whole, ordinary, universal, adjustable and variable life have a feature known as “cash value” or “cash surrender value.” This feature, which is not found in most term insurance policies, provides you with some options:
- You can cancel or “surrender” the policy — in total or in part — and receive the cash surrender value as a lump sum of money. If you surrender your policy in the early years, there may be little or no cash value.
- If you need to stop paying premiums, you can often use the cash surrender value to continue your current insurance protection for a specific period of time or to provide a lesser amount of protection to cover you for as long as you live if there is sufficient cash value.
- Usually, you may borrow from the policy, using the cash value in your life insurance as collateral. 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.
- The interest crediting rate and therefore cash values of many life insurance policies may be affected by your carrier’s future experience, including mortality rates, expenses and investment earnings.
Keep in mind that with all types of permanent policies, the cash value of a policy is different from the policy face amount. Cash surrender value is the amount of available cash when you surrender a policy before its maturity or your death. The face amount is the money that will be paid at death or at policy maturity
What are the Types of Permanent Insurance?
There are many different types of permanent life insurance. The major ones are described below:
Whole Life or Ordinary Life
- This was the most common type of permanent life insurance. It was sold by Mutual Life Insurance Companies, however, some stock life insurance companies do offer a derivative product they call Whole Life. It is Life insurance that is kept in force for a person’s whole life as long as the scheduled premiums are maintained. All Whole Life policies build up cash values. Most Whole Life policies are guaranteed* as long as the scheduled premiums are maintained. The variable in a whole life policy is the dividend which could vary depending on how well the investments and other business criteria of the insurance company are doing. If the company is doing well and the policies are not experiencing a higher mortality than projected, values are paid back to the policyholder in the form of dividends. Policyholders can use the cash from dividends in many ways. It can be used in three main areas: to lower premiums, to purchase more insurance or to pay for term insurance.
Universal Life or Adjustable Life
- This variation of permanent insurance 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 amount of the death benefit more easily than under a traditional whole life policy. (To increase your death benefit, you usually will be required to furnish the insurance company with satisfactory evidence of your continued good health.) (Decreasing does not lower premiums.)
- This type of permanent policy provides death benefits and cash values that vary with the performance of an underlying portfolio of investments held in a separate account. You can choose to allocate your premiums among a variety of investments which offer varying degrees of risk and reward. You will receive a prospectus in conjunction with the sale of a variable product.
- The cash value of a variable life policy is not guaranteed*, and the policyholder bears that risk. However, by choosing among the available fund options, the policyholder can create an asset allocation that meets his or her objectives and risk tolerance. Good investment performance will lead to higher cash values and death benefits. On the other hand, poor investment performance will lead to reduced cash values and death benefits.
- Some policies guarantee* that death benefits cannot fall below a minimum level. There are both universal life and whole life versions of variable life.
Permanent Life Insurance Pros and Cons
- As long as the necessary premiums are paid, protection is guaranteed* for your entire life or to a specific age / maturity.
- Premium costs can be fixed or flexible to meet personal financial needs.(Loans, withdrawals and other transactions may affect the premiums required)
- Policy accumulates a cash value that grows on a tax-deferred basis that you can borrow against. (Loans must be paid back with interest or your beneficiaries will receive a reduced death benefit.) You can borrow against the policy’s cash surrender value to pay premiums or use the cash surrender value to provide paid-up insurance.
- The policy’s cash surrender value can be surrendered — in total or in part — for cash or converted into an annuity. (An annuity is an insurance product that provides an income for a person’s life-time or for a specific period of time.)
- Required premium levels may make it hard to buy enough protection
- It may be more costly than term life insurance if you don’t keep it long enough.
*Guarantees are based on the claims paying ability of the issuing insurance company.
** Availability, specifics, and costs of these riders vary by carrier and state.