In the case of your death, a life insurance policy pays out a lump sum of money to one or more beneficiaries, known as the death benefit. A perpetual life insurance policy is intended to cover your entire life and does not expire after a specified number of years.
Permanent life insurance is classified into four types: whole life, assured issue whole life, universal life, and variable life. Each of these permanent life insurance policy types has unique characteristics, but all have a cash value account that may be accessed.
Here’s what you need to know about permanent life insurance to determine if one of these plans, and which type, is best for you.
What is Permanent Life Insurance?
Permanent life insurance is a form of coverage that does not expire or terminate after a predetermined number of years. It will protect you for the rest of your life if you pay your premiums on time and in full.
When you die, your life insurance policy will pay a tax-free death benefit to your beneficiary. You can designate one or more beneficiaries in the insurance to receive the payout.
Permanent life insurance is sometimes known as “cash value life insurance” since it allows you to save on a tax-deferred basis. When you pay your permanent life insurance premium, a portion of it goes toward the cost of the death benefit, while the remainder goes into a cash-value account.
This is required since insurance costs grow with age. The cash value balances the cost of insurance, allowing you to have a fixed premium (in the case of whole life insurance) or a manageable premium over the duration of the policy. Another advantage of cash value is that you may withdraw money from it or borrow against it once you’ve accumulated assets in it.
How does permanent life insurance work?
Permanent life insurance normally starts with an application. When you are accepted and own an insurance, you must pay premiums to maintain it in effect. Permanent life insurance, while meant to provide a death benefit one day, is also a financial asset while you keep it.
Each of the three periods of a life insurance policy—application, ownership, and death benefit payment—has its own set of features and issues.
Application
To apply for a life insurance policy, you must submit an application for the desired amount of coverage, which the insurance company will use to assess your eligibility and premium.
Submitting a premium payment with an application (also known as a binder) will provide you with interim coverage while the underwriting process is ongoing. If the individual being insured dies while still in the underwriting process and it is confirmed that they would have been approved, the death benefit will be paid to the beneficiaries. Furthermore, paying the payment for conditional coverage might assist reduce premiums by locking in the existing insurance age. The insurance age varies often during the underwriting process, which might take many months for those who have already consulted medical professionals.
A medical exam may (or may not) be required when applying for life insurance, although it is usually necessary to know your and your family’s medical history. The company’s underwriting standards determine whether or not a medical exam is necessary.
If a policy is medically underwritten, it implies the insurer considers your medical history throughout the underwriting process, but it does not always require you to perform lab tests or take an exam.
If the insurance company employs a technique known as expedited underwriting, you may be able to obtain a medically underwritten policy without having to have an exam. Other no-exam plans provide simplified underwriting (usually a basic questionnaire), while others, such as guaranteed issue insurance, ask no questions at all.
In addition to gathering medical information, the insurer may inquire about your work, habits, the reason you want coverage, and other criteria deemed relevant to determine the company’s risk. It may also require that your credit be done, as well as a background check and driving history.
Ownership
After your application is approved, the insurer will confirm the coverage and premium. Before issuing your insurance, you may choose to add additional riders, or features, such as living benefits and premium exemptions for disability. Riders are optional perks that raise the premium.
When you have decided on your selections, you will pay the agreed-upon premium. A portion of the premium payment goes towards the cost of the death benefit. Another percentage is allocated to the policy’s cash value and any additional riders or features you selected.
If you have investment choices (like in a variable life insurance policy), the cash value will be distributed between the investment or fixed accounts you choose. Any policy-related fees or charges are deducted from the cash value or premiums.
You can get cash value from your insurance through a loan or withdrawal. If you acquired optional riders such as critical illness, terminal illness, disability, or chronic disease, you can obtain a portion of the death benefit (also known as the face value) “early,” under specific conditions, as an accelerated death benefit.
It is critical to consider how obtaining a policy loan or withdrawing from the cash value may affect the policy. In some situations, it may put it at risk of lapse or reduce the death benefits.
Payment for the Death Benefit
The death benefit is paid out after you die. Your beneficiary (or beneficiaries) will get the full value of the death benefit, regardless of whether you die five years into the policy or at the conclusion of your long life. If your policy includes a cash value, your beneficiary will often not get both the death benefit and the cash value. However, some plans are intended to pay out both the face value and the accrued cash value. If this feature is essential to you, consult with an insurance representative before purchasing a policy.
Do I Need Permanent Life Insurance?
Permanent life insurance provides various benefits in addition to safeguarding your family’s financial security. Here are some instances of circumstances when permanent life insurance is an excellent choice:
You wish to leave a tax-free legacy for your children.
You want lifelong coverage.
You want to lock in your insurance coverage while you are young and healthy.
You want to utilize life insurance to accumulate tax-deferred savings—as a safety net, retirement income, or to help fund large expenses such as a child’s school or a down payment on a property.
You want to make a significant philanthropic bequest after you die.
You wish to augment existing types of life insurance (term or work-based) with a permanent policy.
If you choose to get life insurance, you are in excellent company: 57% of Americans have life insurance to augment retirement income, 66% to transfer wealth, 84% to cover burial and funeral expenditures, and 62% to replace lost income or earnings.
The two-year contestability term applies to the majority, if not all, of life insurance plans. If you die during the first two years of the policy’s issuance, the insurer may assess your application for serious mistakes and refuse your claim. A claim for suicide-related death may also be dismissed within the contestability period.
Permanent life insurance plans mature on a specific date, such as age 100 or 121. If your policy matures, the life insurance company will pay you at least the entire cash value of the policy, thus terminating coverage and triggering a taxable event. Different policies approach policy maturity differently.
Types of Permanent Life Insurance
If you determine that permanent life insurance is the best option for you, you should assess which form is most suited to your needs.
Whole Life Insurance
Whole life insurance offers a guaranteed death benefit, a stable premium (a premium that does not rise over time), and the option to accumulate cash value. With “participating” whole life plans (available from some mutual insurance firms), you can receive yearly dividends that increase the policy’s value through features such as paid-up additions. If the premiums are not paid, the coverage will lapse.
Note: Top-ranked life insurers that pay dividends include New York Life, Northwestern Mutual, MassMutual, and Guardian.
Universal Life Insurance
With a universal life insurance policy, you can vary your premium payments and the death benefit (although increasing it may need medical underwriting). Policies also provide a minimum guaranteed rate of interest on the cash value. If you do not make premium payments, or your payments are insufficient, the policy will deplete the cash value to cover costs and may eventually expire.
Variable Life Insurance
Premiums can be set or adjustable according on the kind of policy, and there may be a minimum death benefit guarantee. The opportunity to invest the cash value of variable life insurance, often in various mutual funds, through policy subaccounts is a crucial feature. Policy fees and costs are greater for variable life insurance due to their investing elements.
This sort of insurance is more likely to lose money or lapse if the market performs poorly if the premiums are insufficient to meet the policy expenses.
Guaranteed Issue Life Insurance
Guaranteed issue insurance is permanent life insurance that does not need medical underwriting. It is more expensive than plans with medical underwriting and normally provides a minimum amount of coverage (usually less than $25,000 but occasionally up to $50,000).
Most guaranteed issue life insurance policies include a graded death benefit, which means that if you die within the first two years of the policy for any cause other than an accident, your heirs will not get the full face value. Instead, they will only receive the premiums they paid, potentially plus a portion.
Permanent Life Insurance vs Term Life Insurance
While permanent life insurance offers lifelong coverage, term life insurance can cover you for as little as one year and as long as 30 or 40 years. Unlike permanent plans, term policies do not usually include a monetary value. If you die during the term, the beneficiary receives the death benefit; but, after the term expires, you lose coverage.
Term life insurance often has lower rates than permanent life insurance since it only provides coverage for a short time and does not accrue cash value.
