Complete Guide to Permanent Life Insurance
As you may already know, we are on a mission to make life insurance more accessible to everyone. In the past, there has been some common misconceptions around the topic and the life insurance terms used sometimes leave us all confused.
When we are confused, we avoid the topic altogether and we still don’t have a policy in place which can be incredibly harmful financially (and emotionally) to loved ones. Therefore, we already have a guide to term life insurance as well as many other topics and, today, we have everything you need to know regarding permanent life insurance. If you have not already checked it out, don’t miss our article that covers the battle between permanent life insurance vs term life insurance, where we attempt to address the many benefits and drawbacks to each policy and help our readers decide on which type of coverage is best for them.
What is Permanent Life Insurance?
Ultimately, you could say that permanent life insurance is the type of policy that many people think of when they say ‘life insurance’—that is, coverage that last your entire life.
After being set up, the policy will not expire, premiums will be made by the policyholder to keep the insured protected, and the death benefit will be paid to the beneficiary after the insured dies. However, permanent life insurance policies normally hold a cash value too and this can be used in a number of ways including borrowing from the insurance company using your cash value in your policy as collateral.
Permanent life insurance is one of the most popular options for those looking for lifetime coverage with the main benefit being that it lasts until death. As long as the premium payments are made, the coverage will remain in place which gives peace of mind. However, it is slightly more expensive than some other life insurance types because there is no expiry and no end date in sight.
Types of Permanent Life Insurance
If you have done a little research on this topic already, you will know that there are many different types of permanent life insurance, so let’s take a look at the Top 4 Best Policies:
As a contract between the policyholder and the insurers, whole life insurance lasts until death and will see the same premium paid every single month. Regardless of time, this policy will keep going until the death benefit is paid to the beneficiaries upon the passing of the insured. With every payment made, there is a cash value that builds which is put into a guaranteed interest account. Therefore, interest will be added over time and this cash value can be earned tax deferred. In addition, although not guaranteed, you may also receive dividends.
One of the primary reasons people looking for permanent life insurance choose whole life is because of the guarantees. Whole life insurance offer several guarantees:
- Guaranteed Death Benefit
- Guaranteed Cash Value
- Guaranteed Fixed Premiums
- Guaranteed Guaranteed Interest Rate
Otherwise known as ‘adjustable life insurance’, this is a little more flexible because one may increase or decrease the death benefit and premiums. Furthermore, varying amounts of premium can be paid after the first payment – of course, there will be limits in place but they aren’t fixed as we saw with whole life insurance. With this in mind, the face value of the coverage can almost be changed at will. While some people will choose to pay monthly as per a regular life insurance policy, others will choose to pay lump sums less frequently and this is the flexibility that universal life insurance offers.
Indexed Universal Life
Essentially, the core principles of this type of policy come from universal life insurance (IUL) but there is one very big difference and it relates to the cash side of the policy. The cash value of an IUL policy has the opportunity to grow more than whole life because the cash account is tied to a stock index, such as the S&P 500. Most IUL policies have a minimum and maximum guaranteed return. Presently, the minimum on many policies is around 1% with the maximum being around 13%. That means you cannot have a negative return year. It also means that when the stock market has huge gains beyond 13%, your policy gains will be capped.
Variable Universal Life
Similar to mutual funds, the cash side of this life insurance policy will go into various sub-accounts which are then exposed to stocks and bonds. Compared to a regular permanent life insurance policy, there is a chance to see a higher rate of return with variable universal life insurance (VUL).
Once again, there is flexibility because it is still a universal life insurance policy but there will be the main difference we have discussed. For the premium payments, these will go towards the savings component. After the insurer has taken fees out at the end of each year, the rest of your premiums will go towards the separate sub accounts.
Due to the fact that your cash in your VUL policy is actually invested in the market you have the potential to reap huge gains. Consequently, you also are exposed to any and all loses if the market takes a dive.
Permanent Life Insurance Riders
As well as holding a regular policy with the basic rules and regulations, there is also a chance to make adjustments to a single policy and this is done with ‘riders’. By paying a lump sum or a higher premium each month, modifications can be added to your contract (i.e. policy) and here are a list of popular riders for permanent life insurance:
Ultimately, this is for term life insurance but it is important to note here because it applies to permanent policies too. If you are currently contracted to a term life insurance policy or want a term contract now but a permanent one in the future, the conversion option rider will be important for you. With this rider in place, you will be able to convert a term life policy into a permanent life policy using the information you provided when first setting everything up. Although you will need to pay a little more per month, it is good to know that you have options with your term life policy moving forward.
Why would someone convert a term life insurance policy to permanent life insurance? Probably the most obvious is when the insured is diagnosed with a serious health issue. If you are diagnosed as terminally ill or if you believe that you will not be able to qualify for life insurance anymore, converting your existing term life into permanent life insurance makes a lot of sense. And the best news is you can covert your policy for all or a portion of the existing death benefit with no proof of insurability. That means you convert your life insurance with no medical exam needed. Instead, your policy is converted and your original health rate class is applied to your new policy.
Waiver of Premium
With this rider attached to the policy, it will ensure that the premium is waived should the policyholder become disabled or seriously ill. When such an event occurs, it can be a lot of pressure for the family considering they have lost an income source. Therefore, this rider provides protection should the worst happen. When the rider isn’t in place there is a greater likelihood the policy will lapse because of the lack of funds since the insured is no longer working.
Similar to the previous rider, this is another life insurance rider that provides protection should the policyholder become disabled. Although some insurance companies will waive the premiums for a certain amount of time, others will actually provide the policyholder with income during this time. For the most part, this is likely to be around 1% of the face value which can be highly beneficial if the face value of the policy is rather large. For example, a face amount of $250,000 would see $2,500 be paid to the policyholder each month.
For this rider to take effect, there will be some rules in place and most insurance companies say that the disability has to be permanent leaving the policyholder unable to work. Furthermore, there is a six month buffer between disability and then having premiums waived or receiving income. After this, a medical document will need to be sent to the insurance company confirming the timing and a whole host of other details.
If this rider has been selected, the cash value of the policy can be increased by using payments which, in turn, will increase the death benefit as well as the living benefit. Paid up additions allow you to buy paid up additional life insurance, which increases the cash value and death benefit proportionately.
As the name suggests, the accidental death rider ensures that an amount of money is paid to the beneficiary should the insured die in an accidental death. Considering the chances of accidental death in the U.S. is extremely low, this isn’t a rider that many people include in their life insurance policy but it does come in handy for those with potentially dangerous occupations. Normally, there will be an accidental death benefit paid on top of the regular death benefit for the beneficiary.
A child term rider will allow an adult to add their child onto their own policy as long as they are under the age of 17 at the time of being added. Once a child is included in their parent’s insurance, most riders will allow them to stay until the age of 25 but all insurance companies are different in this respect. The best news of all is that the cost of the child term rider covers ALL children, so those with larger families will benefit more than those who have only one or two kids.
Accelerated Death Benefit
Finally, we have yet another popular rider that is typically included free of charge and this is the accelerated death benefit (ADB) rider. If the insured happens to be diagnosed with a terminal illness, this rider will allow the policyholder to take advanced payments from the death benefit. As long as the illness can be proven, an amount can be effectively withdrawn in advance while the remaining death benefit goes to the beneficiary upon death of the insured.
Reasons to Choose Permanent Life Insurance
When estate planning, life insurance is often one of the first things put in place because it allows a certain amount of money to reach loved ones after death. Instead of leaving nothing behind and allowing your family to pay everything, an amount can be put aside to cover death taxes, medical bills, and any other expenses that may arise.
Generally, the death benefit that gets paid to the beneficiary comes free of federal income tax but there are a couple of scenarios that would see the money included in the taxable estate. For example, if the estate value is above the current federal estate tax exemption level of $5,900,000 or $11,800,000 for a married couple.
Also, the policy might be included in an irrevocable life insurance trust and have had an incident of ownership at the point of death which would change the circumstances of the trust.
Regardless, life insurance is used with estate planning because it allows money to reach loved ones quickly and help avoid fire sales of other non liquid assets, such as real estate.
With most plans and retirement packages these days, you pay money for an extended period of time and then don’t even see the full amount after the taxman delves their hand into the pot. However, permanent life insurance policies also allow tax free policy loans which means that you can receive funds during retirement that aren’t subjected to any tax whatsoever. Whether you choose to build the savings yourself or invest in the options we have seen previously, this will be tax free for your retirement fund.
Tax Free Death Benefit
Finally, you will also be safe in the knowledge that your death benefit will typically not be subjected to paying income tax. However, this may not be the case if your estate is above the federal estate tax exemption limit or if you happen to live in a state that has its own death tax. Consult a tax professional on how you can properly structure your estate plan to maximize your life insurance benefits to your beneficiaries.
Now, you should have a full knowledge of the different types of permanent life insurance as well as the different riders that can be purchased alongside the policy. Whether you choose term or permanent life insurance, be sure to assess the pros and cons of each and apply them to your unique circumstances to find the right decision for you!