Life-long protection is offered by a type of insurance known as permanent life insurance, which comes in various forms. These policies are structured and priced with the assumption that they will be kept for a prolonged period. However, if your intent isn't long-term retention, it may not be the appropriate insurance for you.
Permanent policies such as whole, ordinary, universal, adjustable, and variable life typically include a feature called "cash value" or "cash surrender value", which isn't common in term insurance policies. This feature provides several possibilities:
- The policy can be surrendered, either partially or fully, and the cash surrender value can be received as a lump sum. If the policy is surrendered in its early years, the cash value may be minimal or non-existent.
- If there's a need to halt premium payments, the cash surrender value can often be used to maintain your current insurance protection for a specific period or to provide a smaller protection amount for your lifetime, provided there is enough cash value.
- Generally, the policy allows for borrowing against the cash value as collateral, independent of credit checks or other limitations common with most financial institutions. Any loan must eventually be repaid with interest, or the death benefit payable to your beneficiaries will be reduced.
- The cash values of many insurance policies, determined by the interest crediting rate, could be influenced by your insurer's future performance, including factors such as mortality rates, expenses, and investment returns.
Remember, for all types of permanent policies, the cash value and the policy face amount are different. The cash surrender value represents the cash available when you surrender a policy before its maturity or your death, while the face amount is the sum payable at death or policy maturity.
Types of Permanent Insurance
Different types of permanent insurance exist, and the primary ones are described as follows:
- Whole Life or Ordinary Life
This is traditionally the most prevalent type of permanent life insurance. It was primarily sold by Mutual Life Insurance Companies, but now some stock life insurance companies also offer a similar product known as Whole Life. As long as the scheduled premiums are maintained, the life insurance remains in force for the insured's entire life. All Whole Life policies accumulate cash values, which are guaranteed as long as the scheduled premiums are maintained. The only variable factor in a whole life policy is the dividend, which is influenced by the performance of the company's investments and other business criteria. If the company's performance is positive and mortality is not higher than expected, values are returned to the policyholder in the form of dividends. Policyholders can utilize dividend cash in a variety of ways, mainly in three areas: reducing premiums, buying more insurance, or paying for term insurance.
- Universal Life or Adjustable Life
This permanent insurance variation allows you to pay premiums at any time, in any amount (within certain limits), after your initial payment. Additionally, it is easier to increase or decrease the death benefit amount compared to a traditional whole life policy.
- Variable Universal Life
This type of permanent policy offers variable death benefits and cash values based on the performance of a separate account's underlying investment portfolio. You can decide how your premiums are allocated among various investments, each offering different risk and reward levels. The cash value of a variable universal life policy is not guaranteed, and the policyholder assumes the associated risk. However, the policyholder can tailor the asset allocation to meet their objectives and risk tolerance. Good investment performance will result in higher cash values and death benefits, while poor performance will lead to lower cash values and death benefits.
Benefits and Drawbacks of Permanent Insurance
- As long as necessary premiums are paid, protection is assured for your entire life or up to a specific age/maturity.
- Premium costs can be fixed or flexible to cater to personal financial needs.
- The policy accumulates a tax-deferred cash value that can be borrowed against.
- The required premium levels may limit the amount of protection you can afford.
- It could be more expensive than term insurance if it isn't maintained long enough.
Considerations for a Permanent Policy
Consider if the premiums fit within your budget and if you're able to commit to them over the long term. Also, analyze the policy illustration, which includes policy premiums, death benefits, cash values, and other information that can affect your cost of insurance coverage. Keep in mind that some figures are guaranteed and some are not.
Take the time to understand any policy you're considering, but don't delay important decisions that could protect your family. You may have a "free-look" period (usually 10 days) after receiving the policy during which you can decide to keep or cancel the policy. If you choose to cancel, the company will issue a refund. Review your policy periodically or when your situation changes to ensure your coverage is adequate.
Consider the following when selecting a term or permanent policy:
- What happens if you fail to make the required payments?
- What if you become disabled?
- Are other riders available? When will the policy be in effect?
In conclusion, when purchasing a life insurance policy, it's important to understand your long-term commitment and potential benefits. Review the policy details carefully, ask relevant questions, and make sure it fits your personal financial needs and circumstances.
Note: Any reference to the word guarantee is based on the claims paying ability of the underlying insurance company.
© Legacy Secure of MI Inc