Getting a life insurance policy is a great way to protect you and your loved ones from the high costs of funerals and burials. When you look for a policy, you not only need to decide how much life insurance you need, but you also need to think about what kind of life insurance you want. There are two major types – term and perm. Both term and permanent life insurance have their their advantages but in this article, we’ll outline the pros of permanent life insurance.
Find the right life insurance policy for you and your family.
What Is Permanent Life Insurance?
Permanent life insurance is more or less just what it sounds like. It offers lifelong protection no matter how long you live. Your death benefit is guaranteed. (Though there is technically an expiration date around your 120th birthday.) This contrasts with term life insurance, which only covers you for a set amount of time (e.g. 30 years). If you need a rundown on the difference between the two types, check out this guide to the types of life insurance.
The main purpose of permanent life insurance is to ensure that your family’s expenses are taken care of in the event of your death. There are some major benefits to purchasing permanent life insurance. Here are three of them.
1. Cash Value
One of the biggest features of permanent life insurance is that it offers a cash value. Permanent life insurance policies have a cash reserve, often called a savings account, that policyholders can borrow against. This borrowing is known as a policy loan and it can come in really handy.
First of all, what is the cash reserve? It’s a savings account that insurance companies are required, by law, to have. At a certain point, a policyholder’s premiums won’t be enough to cover the potential payout of their death benefit. That’s where the savings account comes in.
The policyholder also has access to this account and can borrow money from it in the form of a policy loan. The interest rates on policy loans are generally lower than the rates on traditional personal loans, so it could save you some money. It also eliminates the hassle of going through the application process for getting a personal loan. There are no credit checks and you don’t have to use the loan for a specific purpose. In fact, you have the option of just not paying back the loan. Because you’re borrowing money from your own account, the insurance company won’t force you to pay it back before you die.
Naturally, there are some caveats with policy loans. This cash reserve is not available for borrowing as soon as you open a permanent life insurance policy. It will take some time before you have enough in the account such that you can take a loan. Once you take a policy loan, don’t forget that you will need to pay interest on whatever you borrow. It’s great to have money when you need it, but anything you don’t pay back will come out of your death benefit should something happen to you. So if you don’t pay back the loan, you could just be hurting yourself and your beneficiaries.
2. Tax Deferred
Money that you contribute to your permanent life insurance policy is tax-advantaged. Similarly to a 401(k), you only pay taxes on that money when you withdraw it. You won’t have to pay any taxes while that money is growing. That creates a major asset for you down the road. If you want to take a policy loan, you actually have more money to borrow because your funds are growing.
Over the first few years of the policy, you might not see a lot of growth. But then you should see some good growth over the remainder of the policy. It’s worth noting though that not all life insurance policies will grow at the same rate.
At the same time, your beneficiaries probably won’t have to pay federal income tax on a death benefit. That means they will receive the full payout of your death benefit.
A third benefit of permanent life insurance is that you have multiple types of policies to choose from. Your options include whole life insurance, universal life insurance, and variable life insurance.
Whole life insurance is the basic, traditional type of permanent life insurance. (You may also see it under the name of straight life insurance or ordinary life insurance.) Whole life insurance guarantees you a death benefit and it gives you a set premium payment. This makes it a very appealing option for some people. Once you agree to a death benefit amount and a premium amount, you don’t have to worry about updating anything. Your benefit won’t change and your premium won’t increase as you get older.
Universal life insurance shares features with whole life insurance but it is all about flexibility. For example, your plan could give you the ability to change the amount of your premium payments each month. The interest rates for universal life insurance plans are also calculated each month. This differs from whole life insurance plans, which calculate interest once per year. The result is that your savings account could earn more money during months when the interest rate is higher. There’s even the potential to skip your premium payment entirely if the investing component of your account earns enough. You also have a couple of kinds of death benefits to choose from. One option is to keep the same benefit amount no matter how much money you have in your savings account. Another option is to choose a benefit that increases in value as the value of your savings account increases.
Variable universal life insurance is a life insurance plan with an investing component. You can think of it as a blend between a life insurance policy and an investment vehicle. The previous two kinds of life insurance also allow you to invest money but they don’t give you much control over how you invest your money. Variable life insurance allows the policyholder to choose where and how they invest their money. These investments work similarly to mutual funds and have the potential to earn better returns than other insurance types.
Bottom Line for Permanent Life Insurance
It isn’t always easy to decide which type of life insurance is best for you. Some people may prefer term life insurance because they only need coverage for a set amount of time. But if you need long-term coverage, you should look into permanent life insurance. Permanent life insurance is more expensive than term life insurance, but it can offer more leeway in the way you pay. Another big perk is that you can borrow money, in the form of a policy loan. So before you buy any life insurance policy, make sure to consider all your options.
Tips for Finding a Life Insurance Plan
- There are many types of life insurance to choose from. If you aren’t sure what the best option is for you, you could consider consulting with a financial advisor. A proper life insurance plan is part of a strong financial plan and so many financial advisors advise their clients on plans.
- Before you buy anything, it’s important to pick the right life insurance policy. Your life insurance needs will also depend on your age, life expectancy, debts and assets. Learn about some mistakes to avoid when buying life insurance.
- Once you’ve decided you’re ready to get a life insurance plan, you should compare life insurance quotes. As with anything else, it’s important to compare prices so that you can choose the plan that gives you the benefit you need at an affordable price.
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