Learn About Permanent Life Policies

Though no one likes to think about the inevitable, it is a necessary part of life. Ensuring a good future for loved ones, and making sure final expenses are met is very important for those left behind. In order to accomplish this, you need to find the right policy for your individual and family’s needs.

Two basic insurance types exist; term insurance and permanent. Term coverage offers protection for a specified period of time, without the benefit of cash accumulation. While less expensive initially, term premiums increase as one ages, and if the insured doesn’t pass away during the term period, no benefit is received. Permanent coverage offers a death benefit in addition to the ability to accumulate cash within the policy. Whole life, universal life, and variable universal life are the three basic permanent insurance policies to become familiar with. Understanding their features and benefits will help you make an informed decision regarding which meets your specific needs.

Whole Life

Whole Life Insurance policies are permanent insurance contracts that allow the insured to withdraw or borrow against his or her policy should the need arise. It also pays out a predetermined amount upon the death of the insured person. Premiums are level over the duration of the policy, which is typically to age 99, 100 or 121, depending upon the particular policy.

Uses

This is a basic form of permanent insurance. It can be used to build wealth which each premium payment, and as it offers guarantees on the cash value accumulation, conservative investors are often drawn to this insurance type. As time goes on, the cash value accumulated within policy can be borrowed, for any personal use. As long as these withdrawals are performed while the policy is in-force, they are considered free from all taxation.

Features & Benefits

The major benefits of having whole life insurance is that these policies typically have level premiums that do not increase over the life of the policy: in other words, the insured will pay fixed-rates over the life of the policy. An additional benefit for whole life insurance is that the basic plans have the smallest out-of-pocket expenses over the policy’s duration.

Tax Advantages

The biggest advantage to this type of policy is that portions of the premiums contribute to a savings account wherein the dividends build up without being subject to capital gains taxes. And as previously mentioned, should the policy remain in force while distributions are being made in the form of a policy loan, those proceeds are not subject to federal or state income tax; a huge benefit for anyone, but particularly for those investors in higher tax brackets seeking any break possible.

Policy Flexibility

There is not a great deal of flexibility with whole life insurance. These policies are associated with set premiums that accumulate over time for a set death benefit and certain rules and regulations apply to early withdrawals and borrowing. However, it is a guaranteed benefit in the event of the insured’s death to be free of taxes (unless it is part of an estate). As long as the premiums are kept current, the death benefit will be paid. Ultimately, these policies are very straightforward without a lot of optional features to consider or add.

Universal Life

Universal life insurance is similar to whole life insurance but with more flexibility. In simplest terms, universal life is considered to be a form of permanent term insurance. While the premium for these policies is often presented to be level, it can be adjusted. As the insured’s circumstances and needs changed, this type of policy can be adjusted—including premiums, savings, and death benefit.

Uses

Uses of universal life insurance include a standard death benefit (that is predetermined and can be changed over time if the needs of the insured change), and the ability to use the interest on the savings to pay for its own premiums. They can also borrow against the policy and make withdrawals when necessary. However, as these policies do not generally build cash value, they are most commonly used as estate planning vehicles, not cash accumulation vehicles. Due to this variation, universal life is often considered to be the most expensive type of permanent life insurance coverage.

Features & Benefits

The major features and benefits associated with universal life policies are that part of the premiums are invested by the insurance company in order to get returns that are applied toward the policy without tax (tax-deferred). There is also an added benefit of a minimum interest rate for the policy, so there is always a return on the money invested regardless of the market performance. The cash value fluctuates over time as the policy holder invests through paying premiums.

Tax Advantages

The proceeds from the premium investments are tax-deferred and allow for tax-sheltered growth. The income cannot be taxed as long as it is used to cover the premium costs. The death benefit is also not subject to inheritance tax (always check with a certified accountant or tax attorney to verify). And lastly, in the event that this policy builds cash value, it can be borrowed against as long as the policy remains in force through age 100 or death, free of income taxes.

Policy Flexibility

This type of policy is more flexible than whole life insurance as it is adjustable over the life of the policy. Additionally, the policy holder can be more flexible with payments than with basic whole life insurance—such as paying more or less than what has been billed, and when to pay the premium. This is an option preferred by those who have occasional cash flow problems and need to adjust payments accordingly.

Variable Universal Life

This is likely the most expensive type of policy of the three—but allows the policy holder to have maximum control over their policy. The policy holder can allocate portions of the premium funds to certain investments—stocks, bonds, and money markets, for example. The greater expense is not due to an increased cost of insurance, but to the ability to set aside more monthly premium into savings vehicles for future financial goals and objectives/

Uses

The primary use of variable universal life insurance is the death benefit—which can be maximized over the life of the policy to a large sum of payout for the beneficiaries. The policy can also be used for education planning and retirement planning, due to the cash accumulation capabilities embedded within the policy.

Features & Benefits

The biggest benefit to variable universal life insurance is that with sound investing, the end- result (death benefit) can be fortified to a great degree. This policy type gives maximum control to the policy holder—with the exception of withdrawing the cash value (but it still allows for withdrawals and borrowing against the policy).

Tax Advantages

This is another good example of a tax-sheltered policy, where the investments are tax- deferred (until the policy is surrendered). Should the insured wish to withdrawal their cash value during their lifetime, as long as it is completed properly, the proceeds are free from federal income taxation. When the policy is highly funded, the tax benefits outweigh the cost of the insurance. This type of policy can also be used to set up a life insurance trust and avoid estate taxes or reduce them greatly (this should be verified by a certified accountant or tax attorney).

Policy Flexibility

The policy has flexibility on allowing the interest from the invested premiums to pay for the future premiums, which can lower the costs over time (if the investments have performed well). There is also a great deal of flexibility with death benefits, as the money can be increased overtime for a better payout to the beneficiaries.

How to Choose the Appropriate Death Benefit Amount

Death benefit, also known as survivor benefit, depends upon the type of policy and terms of payment. The best guideline for determining what is the right amount to payout upon the insured’s death will depend on several factors: the lifestyle maintenance needs of the beneficiaries (children and/or surviving spouse), the costs of burial expenses, and the amount of debts to be paid upon the death of the insured.

When determining surviving income needs, a solid rule of thumb is to use 5% interest annually in order to determine how much income will be derived from insurance and investment proceeds. For example, if your survivor requires $50,000 per year in income to maintain the current household’s expenses, at 5%, the individual would require an amount equal to $1,000,000 to be set aside in an account. While this may initially sound like a significant amount of insurance, when you break it down to annual needs, most people realize that they are far under-insured for their respective financial goals and needs.

Comparing Companies: What to Look For

When selecting insurance, it’s a good idea to look for policies that offer maximum flexibility and buy-up options: such as a whole life insurance that allows for flexible premium payments. Overall, it’s a good idea to use a life insurance calculator; then work from there to see which company has the best premiums for the insured’s age group and overall health.

In conclusion, choose a policy that fits the entire family’s needs with premiums that will not break the family budget. A policy is of no use if the premiums cannot be paid and it expires. Comparing coverage levels, options available, and using point-by-point comparisons will help tailor a plan that is suitable for the entire household. Online life insurance premium calculators and consulting with insurance agents can be beneficial in choosing the most appropriate plan. Depending on budgetary concerns and expense projections, a permanent life insurance policy can be tailored for any individual and familial necessities.