What is permanent life insurance?

What is permanent life insurance?

By: Emily Miller

Whole life or permanent life insurance not only offers protection throughout the course of your life but also serves as a fruitful investment.

According to the Life and Health Insurance Foundation for Education, there are four types of whole or permanent life insurance: traditional whole life, universal life, variable life and universal variable life.

Traditional whole life

Traditional whole life has a level death benefit and premium throughout the duration of the policy. The cost of the benefit increases as the policyholder ages. In order to maintain a level premium, the premium charged to the policyholder is higher at the start of the policy in order to exceed the amount of money needed to pay claims. When this happens, the insurance company invests the extra money and then uses it to supplement the level premium in order to afford the cost of life insurance for older people. As you get older, the potential risk of you dying is higher.

This process of overpayment comes with some limitations. Once the cash value reaches a certain amount, the money is then made available to the policyholder in a cash value account that they can borrow against. Once the cash value matures (typically in 7 to 10 years); the insurance company uses it to pay the premiums, this is known in the industry as a policy being “paid up.”

Universal life (UL)

A universal life policy allows you to increase or decrease the death benefit amount to fit new needs. The policy also provides greater flexibility when it comes to paying premiums. Universal life has a cash value account that is tied to the rate of interest in the money market. After money has accrued in the account, the policyholder can use the cash value to determine the amount of premium they would like to pay (above the minimum payment) and when.

Variable life (VL)

This type is tied into an investment portfolio (stocks, bonds, money market mutual funds) that builds cash value depending on how well the stock market performs. Generally, a high return on the cash value is not guaranteed, and with some policies, neither is the death benefit. This is why its best to find a policy that at the very least guarantees the death benefit will still be there, regardless of how well the cash value performs.

Variable-universal life (VUL)

It is an alternative to variable life that combines the features of a universal policy with a variable life policy. It has the investment component coupled with the ability to adjust the death benefit and the amount of premium you wish to pay.

The Insurance Information Institute (III) notes that the amount you’ll likely be paying  for a policy is dependent on the cost per $1,000 of death coverage. Also, the premium for a whole life policy is higher than a term life policy. In some cases it can be five to ten times higher.

If you’re buying a cash value policy such as variable life or variable universal life, financial planner for MetLife, Tony Franks, says that it is especially important that customers research the companies they intend to buy a policy from.

“You should look at the financial strength of the companies along with their track record of service,” said Franks. “A good practice is to look at how long the broker or agent has been in business and how well they understand the product. These products can be complicated, so you need to talk to an agent who knows how they work.”

Before making any decisions, Franks advises that the customer should find out the following information: what services will be offered in the future, what the internal rate of return will be on the policy, what the past dividends are and the projected cash value.

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