The most direct answer to the question, “What is permanent life insurance?,” can be just that it’s life insurance that lasts a lifetime. Unlike other forms of insurance which expire inevitably, like term insurance, permanent life insurance plans activate upon death whenever that moment comes.
In addition to this main, lasting feature, permanent life insurance usually also comes with built-in features that other policies cannot boast. For instance, there are additional savings vehicles and investment options through cash value that come relatively standard with permanent insurance.
Finally, it’s key to know that you won’t find these policies named simply “permanent.” Instead, there are two kinds of policies—whole and universal—that primarily make up the offerings of permanent life insurance. While each of these types has various subgroups with unique elements, it’s useful to explore the details of universal and whole life insurance below.
Grasping Universal Life Insurance
There is considerable variation and complexity to universal life insurance, but there are also ways that the policies say stable within the general category. Here are some features common to the universal life insurance packages that you’re likely to encounter as you shop for your insurance plan.
We’ll jump into whole life insurance later, but universal life policies do not use the same level premium that typically comes with whole life. Rather, universal life has a minimum cost that must be satisfied through payments. There is also a maximum deposit amount that’s set for tax purposes when it comes to tax-deferred cash value savings contributions. Each year the minimum cost must be met and the maximum deposit not exceeded.
The advantage of not having the same premium structure as whole is that premiums don’t always come out of your own resources. Instead, if there are sufficient amounts within your cash value account, you can cover the minimum cost from those funds. This is helpful as the cost of insurance rises each year to meet the increased risk that you will pass away from some cause as you age.
By using cash value, you can still outrun the pace of rising insurance costs yearly when you invest heavily into your cash value savings. Investing well means that your savings can grow beyond what the insurance costs so that you create value rather than sink money from your pocket.
As we mentioned, there are many kinds of universal life insurance. They vary mostly on the way that add-on savings vehicles are deployed for the benefit of the insured. Cash value can be used differently across four kinds of policies:
- Guaranteed Universal
- Indexed Universal
- Traditional Universal
- Variable Universal
Now, let’s turn to the features and benefits of whole life insurance to see how the structure and likely outcome of the plans differs from universal life.
Comparing Whole Life Insurance
Whole is named very clearly as a policy that lasts for the entire lifetime of the insured (just like universal life insurance does). However, the premium comes level with whole life insurance plans. That signals that the premium never shifts or rises during the permanent term of the policy. Instead of rising with the rate of mortality, the rate is specially calculated for the insured’s applicant profile and quoted accordingly.
While this can save money in the long term, it does mean that premiums start higher than universal life insurance. Over time, this higher premium conserves resources that come out of your financial reserves by not steeply jumping with each passing year. Though the funds come out personally to pay premiums, whole life insurance still resembles universal life insurance with its use of cash value.
In one form, guaranteed cash value makes it so that the money you pay to the insurance company can build up a reserve. This is when you pay more than the cost of mortality that they calculate for your profile. You can access and use this reserve even while you are still living. Though it affects your death benefit ultimately, the guaranteed cash value promises to keep the basic death benefit of the policy the same despite access to the reserve.
Alternatively, projected cash value bases itself on dividends. In this way, policyholders are essentially partial owners of the insurance company and, for that reason, can share in its profits. When the insurance companies see that they charged you a certain amount alongside lower mortality and good market returns, they can give you a refund for any excess above the cost of insuring you.
Find Permanent Life Insurance with Sproutt
If you seek life insurance that’s guaranteed to pay out with extra perks for the policyholder while the insured still lives, then get quotes on permanent life insurance through Sproutt, a leading insurance broker with deep market insight.