In the three prior articles we covered the basics of life insurance, who needs life insurance, and we compared term and employer-sponsored policies. This article will address the different types of permanent life insurance and when they might be appropriately used.
As the name states, permanent life insurance policies remain in-force (will pay the death benefit) for as long as the premium amount is met. There are three main differences between term and permanent policies:
- Term policies are written for a specific amount of time (usually 10-30 years), whereas permanent policies are typically intended to last until death.
- Permanent policy premiums are more expensive for otherwise comparable coverage.
- Permanent policies are intended to eventually pay the death benefit. Term policies, however, are like car or medical insurance – you have it, but you hope not to have to use it.
There are three main types of permanent policy options:
- Whole life – charges a fixed premium and provides a fixed death benefit for life. The policy also accumulates cash value, which you can withdraw or use to pay the policy premium.
- Universal life – offers a flexible premium and death benefit. This means you can change the amount you pay (and the amount of coverage you have, within limits) if you need to. Most of these types of policies accumulate cash value tied to a stated rate of interest.
- Variable universal life – combines the flexible premium and death benefit of universal life with the performance of investment accounts. These policies rely on investment performance and may accumulate more or less cash value than standard whole life or universal life policies.
While permanent life insurance is not the best solution for most situations, here are a few examples of when it might be appropriate:
- Special needs child – a permanent life insurance policy may be purchased for the benefit of a child with special needs who will need care after your death.
- Buy-sell agreement – joint business owners (or the business entity itself) often purchase permanent life insurance policies on each other to help purchase their interests upon their death.
- Estate taxes – permanent life insurance can be used to help pay for federal estate taxes and/or provide beneficiaries with tax-free proceeds not included in the decedent’s estate.
Permanent life insurance can be complicated. It is often associated with high fees and commissions. In our final article, we will discuss the approach we take with our clients regarding life insurance.
If you have questions about your current life insurance policy or would like to learn more, please contact us.
Fixed insurance products and services offered through CES Insurance Agency.
