Permanent Life Insurance
Note: Any reference to the word guarantee is based on the claims paying ability of the underlying insurance company.
Permanent life insurance provides lifelong protection and is known by a variety of names. These policies are designed and priced for you to keep over a long period of time. If you don't intend to keep the policy for the long term, it could be the wrong type of insurance for you.
Most permanent policies including whole, ordinary, universal, adjustable and variable life have a feature known as "cash value" or "cash surrender value." This feature, which is not found in most term insurance policies, provides you with some options:
- You can cancel or "surrender" the policy -- in total or in part -- and receive the cash surrender value as a lump sum of money. If you surrender your policy in the early years, there may be little or no cash value.
- If you need to stop paying premiums, you can often use the cash surrender value to continue your current insurance protection for a specific period of time or to provide a lesser amount of protection to cover you for as long as you live if there is sufficient cash value.
- Usually, you may borrow from the policy, using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit.
- The interest crediting rate and therefore cash values of many life insurance policies may be affected by your carrier's future experience, including mortality rates, expenses and investment earnings.
- Keep in mind that with all types of permanent policies, the cash value of a policy is different from the policy face amount. Cash surrender value is the amount of available cash when you surrender a policy before its maturity or your death. The face amount is the money that will be paid at death or at policy maturity.
What are the Types of Permanent Insurance?
There are many different types of permanent insurance. The major ones are described below:
Whole Life or Ordinary Life
- This was the most common type of permanent life insurance. It was sold by Mutual Life Insurance Companies, however, some stock life insurance companies do offer a derivative product they call Whole Life. It is Life insurance that is kept in force for a person's whole life as long as the scheduled premiums are maintained. All Whole Life policies build up cash values. Most Whole Life policies are guaranteed* as long as the scheduled premiums are maintained. The variable in a whole life policy is the dividend which could vary depending on how well the investments and other business criteria of the insurance company are doing. If the company is doing well and the policies are not experiencing a higher mortality than projected, values are paid back to the policyholder in the form of dividends. Policyholders can use the cash from dividends in many ways. It can be used in three main areas: to lower premiums, to purchase more insurance or to pay for term insurance.
Universal Life or Adjustable Life
- This variation of permanent insurance allows you, after your initial payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. You also can reduce or increase the amount of the death benefit more easily than under a traditional whole life policy. (To increase your death benefit, you usually will be required to furnish the insurance company with satisfactory evidence of your continued good health.)(Decreasing does not lower premiums.)
Variable Universal Life
- This type of permanent policy provides death benefits and cash values that vary with the performance of an underlying portfolio of investments held in a separate account. You can choose to allocate your premiums among a variety of investments which offer varying degrees of risk and reward. You will receive a prospectus in conjunction with the sale of a variable product.
- The cash value of a variable universal life policy is not guaranteed*, and the policyholder bears that risk. However, by choosing among the available fund options, the policyholder can create an asset allocation that meets his or her objectives and risk tolerance. Good investment performance will lead to higher cash values and death benefits. On the other hand, poor investment performance will lead to reduced cash values and death benefits.
- Some policies guarantee* that death benefits cannot fall below a minimum level. There are both universal life and whole life versions of variable universal life.
Advantages and Disadvantages of Permanent Insurance
- As long as the necessary premiums are paid, protection is guaranteed* for your entire life or to a specific age / maturity.
- Premium costs can be fixed or flexible to meet personal financial needs.(Loans, withdrawals and other transactions may affect the premiums required)
- Policy accumulates a cash value that grows on a tax-deferred basis that you can borrow against. (Loans must be paid back with interest or your beneficiaries will receive a reduced death benefit.) You can borrow against the policy's cash surrender value to pay premiums or use the cash surrender value to provide paid-up insurance.
- The policy's cash surrender value can be surrendered -- in total or in part -- for cash or converted into an annuity. (An annuity is an insurance product that provides an income for a person's life-time or for a specific period of time.)
- Required premium levels may make it hard to buy enough protection.
- It may be more costly than term insurance if you don't keep it long enough.
Permanent Policy - Points to Consider
- Are the premiums within my budget? Be sure you want to spend the money for this type of long-term coverage.
- Can I commit to these premiums over the long term?
- If you don't plan to keep the product for many years, consider another type of policy.
- Cashing in a permanent policy after only a couple of years can be a costly way to get insurance protection for a short term.
What does the policy illustration show?
An illustration shows policy premiums, death benefits, cash values and information about other items that can affect your cost of obtaining insurance. Your policy may provide for dividends to be paid to you as either cash or paid-up insurance. Or it could provide for interest credits that could increase your cash value and death benefit or reduce your premium. These items are not guaranteed*. Your costs or benefits could be higher or lower than those illustrated, because they depend on the future financial results of the insurance company. With variable universal life, your values will depend on the results of the underlying portfolio of investments.
Some figures are guaranteed* and some are not. Remember that the insurance company will honor the guaranteed* figures, subject to its financial strength.
If your policy is a variable universal life policy, be sure that the interest rate or rate of return assumed is reasonable for the underlying investment accounts to which you choose to allocate your premiums. It is important to keep in mind that an illustration is not a legal document. Legal obligations are spelled out in the policy itself.
Here are additional questions to ask about the policy illustration:
- Is the illustration up to date? Is it based on current experience?
- Is the classification shown in the illustration appropriate for me (i.e., smoker/non-smoker, male/female)?
- When are premiums due annually, monthly or otherwise? Which figures are guaranteed* and which are not?
- Will I be notified if the non-guaranteed* amounts change?
- Does the policy have a guaranteed* death benefit, or could the death benefit change depending on interest rates or other factors?
- Does the policy pay dividends or provide for interest credits? Are those figures incorporated into the illustration?
- Will my premiums always be the same? Is it possible that the premium will increase significantly if future interest rates are lower than the illustration assumes?
- If the illustration shows that, after a certain period of time, I will not have to make premium payments, is there a chance I could have to begin making payments again in the future?
- Is the premium level illustrated sufficient to guarantee* protection for my entire life?
Here are a few tips to keep in mind when purchasing a life insurance policy:
- Take your time. On the other hand, don't put off an important decision that would protect your family. Make sure you fully understand any policy you are considering and that you are comfortable with the company and product.
- After you have purchased an insurance policy, keep in mind that you may have a "free-look" period usually 10 days after you receive the policy during which you can change your mind. During that period, read your policy carefully. If you decide not to keep the policy, the company will cancel the policy and give you an appropriate refund. Review the copy of your application contained in your policy. Promptly notify your agent or the company of any errors or missing information.
- Review your policy periodically or when your situation changes to be sure your coverage is adequate.
Here are some additional items to consider when you are selecting a term or permanent policy:
- What happens if I fail to make the required payments? If you miss a premium payment, you typically have a 30- or 31-day grace period during which you can pay the premium with no interest charged. After that, the company can, with your authorization, draw from a permanent policy's cash surrender value to keep that policy in force as long as there is sufficient cash surrender value. In some flexible premium policies, premiums may be reduced or skipped as long as sufficient cash surrender values remain in the policy. However, this will result in lower cash surrender values.
- What if I become disabled? Provisions or riders that provide additional benefits can be added to a policy. One such rider is a "waiver of premium"** for disability. With this rider, if you become totally disabled for a specified period of time, you do not have to pay premiums for the duration of the disability.
- Are other riders available?
- "Accidental death benefit", provides for an additional benefit in case of death as a result of an accident. This rider, if available, would require additional premium. Availability and specifics varies by carrier and state.
- "Accelerated benefits", also known as "living benefits." This rider allows you, under certain circumstances, to receive the proceeds of your life insurance policy before you die. Such circumstances include terminal or catastrophic illness, the need for long-term care or confinement to a nursing home. This rider, if available, may require additional premium. Availability and specifics varies by carrier and state.
- "Child rider", provides insurance for all your children, usually ranges from $1,000 to $20,000 of death benefit. This rider, if available, would require additional premium. Availability and specifics varies by carrier and state.
- When will the policy be in effect? If you decide to purchase the policy, find out when the insurance becomes effective. This could be different from the date the company issues the policy.
*Guarantees are based on the claims paying ability of the issuing insurance company.
** Availability, specifics, and costs of these riders vary by carrier and state