What is Permanent Life Insurance?
Compared to the temporary life insurance which becomes forfeited after one or a few years, the permanent life insurance schemes do not expire, as they do not have a predefined validity period. Another feature that permanent insurance has compared to temporary one is having both a death benefit and a savings component. So this product is chosen by those who want to have permanent protection as well as want to build up a cash value in the meantime.
Therefore, for those who would like to have a savings option, the only possibility is to conclude a permanent life insurance contract. In this case, after a certain period of time, the policyholder will have the opportunity to borrow from his/her savings or withdraw money for certain future goals. This is the primary benefit of permanent life insurance. Also, the insurance company cannot cancel the policy for any reason, except discovering intent to defraud in the application.
Paying attention to the details is essential. For instance, one can seize the above-mentioned opportunity (namely, borrowing from the savings component) only after a certain period of time has passed away from the purchase of the policy. This means that a policy owner has to pay his/her contributions regularly until he/she accumulates enough cash value. After this, he/she becomes eligible for the borrowing option. Similarly, one needs to be careful not to accumulate unpaid interest on one’s loan, as borrowing from the insurance’s savings component works just like taking out a loan. Therefore if one has much accumulated unpaid interest and any outstanding balance at the same time, one may lose the policy and the coverage provided by it.
Talking about typology, one can mention two basic permanent life insurance categories: the whole-life as well as the universal life insurance. Whole life insurance requires level-premiums and uses a cash-value table. Some of the advantages of this coverage are the guaranteed death benefits, the guaranteed cash values, the fact that annual premiums are fixed, and that mortality/expense charges cannot reduce the policy’s cash value. Talking about the disadvantages, one can say that the premiums of the whole life insurance are inflexible, and the policy’s internal rate-of-return may not be compared with other existing savings options. Finally, the premiums are higher than those required by term-insurances, but this is only a short-term disadvantage. In the long run, these high premiums are counterbalanced with the benefits of this scheme.
A whole life insurance’s cash value may be used at any time by taking out a so-called ‘policy-loan’. Although one is not obliged to pay back such a loan, the payback is still advisable – otherwise, these loans decrease the policy’s death benefit. Similarly, one should know that in case the insured dies, the beneficiary will not get the policy’s cash value, but only the so-called death benefit. However, there is the option for the insured to pay additional sums of money regularly (a so-called dividend), which increases the value of the death benefit.
Second, universal life coverage is a somehow new insurance product designed to have more flexible features regarding premium payments as well as more advantages regarding the policy’s internal rate-of-return. Universal life insurance policies also have cash accounts which increase as premiums are accumulated. This account works like a typical loan, so it has interests specified by the insurance company. The policy’s surrender value is the amount that remains in the cash account minus the possibly occurring surrender charges. One should know that there are several categories of universal life insurance schemes, and one can easily choose that type that best fits one’s needs.
With universal life insurance, the cash value seems to be more easily attainable as the insured may stop paying premiums if the cash value allows this option. Similarly, the scheme has a more flexible death benefit as the insured may choose between Option A and Option B. The first option pays the face amount in case of death, while the second pays the face amount added to the cash value. This B-option increases the net death benefit continuously along with the cash-value being accumulated. However, with this option, the cost of the insurance never decreases.
All in all, one can enjoy the permanent life insurance benefits, so besides having coverage, one can borrow funds, but being careful not to make the policy lapsed is essential!