What Is Permanent Life Insurance?
In my last article, I explained what term insurance was. In this article, I will go over what permanent life insurance is.
In essence, permanent life insurance is just like its name: it is life insurance that never goes away (not like term life insurance); it is permanent. It is a life insurance product where the premiums never change, and the coverage never goes away. This means that the premium you pay at the beginning of the policy will be the premium that you always pay. It also means that whether you pass away 3 years after getting the policy or age 103, your beneficiaries will be paid the death benefit of the policy.
There are three main types of permanent life insurance:
T-100 is a permanent life insurance that spreads out premium payments until age 100, or until you pass away. If you live past age 100, you no longer pay premiums, but you still have coverage.
Whole life insurance is like a T-100 except that there are a couple of extra features:
- You have a cash value to the policy. This means a couple of things:
- You can borrow money from the policy if you so choose. After a period of time, if you need some extra cash, you can borrow from your own policy. The advantage is you can borrow, the disadvantage is that you need to pay it back to maintain the death benefit of the policy, and the insurance company will charge you a high interest rate when paying it back.
- If you decide that you can no longer pay for the policy and stop paying the premiums, the policy is still worth something called the paid up value. It will not be worth as much as the original death benefit, but something is still better than nothing.
- You can choose to pay the policy over a shorter time period if you wish, instead of to age 100. For example, you can choose a 20-pay, in which your policy is a paid up policy after 20 years. In other words, after 20 years, you no longer pay for the policy, but the policy is still in effect for the rest of your life. Different life insurance companies have different pay periods from which you can choose.
The easiest way to think of a universal life policy is that it is like a T-100 with an additional investment option as well. If you only ever pay the ‘minimum’ premium of the policy, a universal life policy will act exactly the same way as a T-100. However, if you wanted to pay more than the minimum premium, that extra amount goes toward an investment portion of your policy. Just like any other investment, you have options as to what kind of investment you would want to invest into – bonds, money market, mutual funds etc.
If this extra premium increases in value as it is invested, so does the death benefit, and vice versa. The T-100 portion of the universal life guarantees a minimum death benefit, with the investment portion allowing for additional growth within the policy. Every universal life policy has a maximum premium that is allowed.
So you can see there are 3 main options when getting permanent life insurance, and depending on your needs will determine which option is best for you.