AT IBUSA, we work with companies that offer both term and permanent covarage, because the best life insurance company for you will depend on your needs, based on your unique goals and objectives.
In the following article we will define permanent life insurance AND offer various instances when it makes sense to choose permanent life insurance over temporary term life insurance.
What is Permanent Life Insurance?
When defining permanent life insurance it is important to contrast it with what it is not. Permanent life insurance is not term life insurance.
Rather, it refers to a broad category of life insurance that offers ongoing benefits for the life of the insured. Life insurance that offers permanent benefits is distinguished from temporary life insurance that offers benefits for a set period of time.
When suggesting that permanent life insurance offers permanent benefits, we are talking about a permanent death benefit once the policy premium is completely paid for (or paid up) AND some level of accumulation of cash value within the policy.
Permanence and accumulation of cash value are the 2 factors that separate permanent life insurance from term life insurance.
Permanent Life Insurance vs. Term Life Insurance
Buying vs. Renting a Death Benefit
Temporary life insurance, more commonly known as term life insurance, does NOT offer a permanent death benefit. Term life insurance offers a specified amount of death benefit for a specified term.
A longer term or higher death benefit (as well as the age and health rating of the individual policy applicant) determines the cost of this insurance. There is no cash accrual or other permanent benefit of any kind.
For the above reasons, term life insurance rates are less when compared to any type of permanent life insurance. The comparative low cost of term life insurance is why financial entertainers often state you should “buy term and invest the difference”.
Different Types of Term Life Insurance
There are different lengths of term life insurance such as 5, 10, 15, 20, 25, 30, 35, and 40 year level term.
These level term life insurance policies offer coverage at a fixed premium for a set period of time. Upon expiration of the term, the premiums for the coverage will typically skyrocket, so that the policy will not longer be practical to maintain and a new term policy may be needed.
There is also annual renewable term insurance which isn’t fixed for a set term of more than a year and offers premiums that increase gradually year after year.
Convertible term life insurance allows the temporary term policy to be converted to a permanent life insurance policy if elected within the policy period.
We highly recommend this approach because it preserves the option to convert from temporary to permanent life insurance for any number reasons.
For example, if a person’s health declines, he or she may no longer qualify for renewable term and a permanent life insurance may be needed.
2 Types of Permanent Life Insurance
The 2 broad TYPES or categories of permanent life insurance are:
- Whole Life Insurance
- Universal Life Insurance
The 2 types of permanent life insurance are different animals both philosophically and practically.
As analogy, if most universal life products can be referred to as a thoroughbred racehorse, most whole life products may be deemed the Clydesdale workhorse.
The exception may be guaranteed universal life (GUL) which is similar to whole life in terms of offering conservative cash value growth, although the cash value growth of whole life can greatly exceed GUL when designed properly.
The difference between the whole life workhorse and the universal life racehorse is how life insurance assets are invested AND the level of guaranteed growth within the policy.
Flexibility of premiums is also an important consideration when differentiating these 2 major types of permanent life insurance.
Whole Life Insurance vs. Universal Life Insurance
Whole life insurance policy returns are conservative and based upon the insurance company’s pool of extremely conservative investments and thus are guaranteed at rates which have been relatively consistent over the last 200 years.
In addition, if the whole life insurance company’s pool of investments performances well, then policy holders, in a mutual whole life insurance company, will receive a higher return, project as non-guaranteed, which is based upon a return of premiums to policy holders.
Within the arena of whole life insurance, policies mostly differ in terms of the “bells and whistles” attached and what the company chooses to offer policy holders.
Some companies, for example, will offer better options for paid up additions riders in order to facilitate cash value accumulation strategies such as infinite banking.
Whole life policies may also differ in design depending upon the goal sought by the policy applicant.
If a permanent death benefit and lower costs is preferred, then the policy will NOT be designed to enhance cash value accumulation AND vice versa if cash accumulation is sought over permanent death benefit.
Universal life insurance policy returns depend upon the type of product selected and may be either guaranteed, tied to a market index OR depend upon the success of the financial markets, and investments vehicles such as mutual funds.
Policies often offer a floor, to prevent market losses of greater than zero AND may cap gains at a certain rate depending upon the risk of the given index.
Guaranteed Universal Life Insurance ties policy cash value growth to a fixed interest rate of return
Indexed Universal Life Insurance ties policy growth to a selection of market indexes such as the S&P 500
Variable Universal Life Insurance ties policy growth to investments in the financial markets such as mutual funds or even hedge funds
So the key with universal life, is that a policy can be designed to accommodate the level of risk, reward that you’re seeking.
If you have more of a risk taking preference, then a variable policy may offer the chance for greater market returns with the greater risk of losses.
Thus, the potential opportunity for higher returns due to stock market investing should be weighed against greater stability and predictable returns year after year.
Top 5 Reasons to Choose Permanent Life Insurance
Permanent life insurance offers benefits that term life insurance by nature cannot offer. Let’s review:
- Permanent death benefit
- Peace of mind if health changes
- Accruing cash value for secure retirement and/or investing
- Tax advantaged growth and leverage
- Asset protection
Permanent Death Benefit
As long as you make your minimum required premium payment, your permanent insurance policy will remain in force, making it so you cannot outlive permanent life insurance.
And based on how your policy is designed, your premium can remain fixed for your entire life.
Peace of Mind
If you have a permanent life insurance policy, then no matter what happens in life, whether sickness or disease, your insurance provider cannot cancel the policy.
Retirement or Investment Funds
By nature, term life insurance cannot contribute to funding retirement or providing future capital for investment because it doesn’t build cash value.
Permanent life insurance can do this by allowing cash value to building inside the policy in a tax advantaged environment.
This is a key aspect of cash value life insurance AND can be applied as part of a retirement planning with life insurance strategy OR as a way to create private financing for real estate or other investments.
When cash value accumulates inside a permanent life insurance policy, tax advantages are allowed under current rules because it is a life insurance policy.
Rather than having taxable gain on 100% of the growth of your accounts, your life insurance cash value can grow tax free, increasing you overall financial leverage AND return on investment return on investment.
This is allowed due the payment of whole life dividends which are basically defined as a “return of premiums” to the policy holders rather than regular income.
And this is a potential key benefit to ALL permanent life insurance but particularly traditional whole life insurance policies.
In many states, permanent life insurance, along with a number of other asset classes, gets special asset protection under state laws.
This means that the cash value in your policy NOT ONLY gets special tax treatment, but may also get protection from lawsuits and rogue creditors.
This benefit also relates back to retirement planning, and helping you create a secure future.