The Ultimate Guide to Permanent Life Insurance
We’re sure you’ve heard about term life insurance before, but what exactly is permanent life insurance? How does it differ from term, and what are the different types of permanent life insurance policies?
Well look no further, here is your ultimate guide to permanent life insurance.
Quick Article Guide:
- The Basics
- Term or Permanent?
- Whole Life Insurance
- Universal Life Insurance
- Variable Universal Life Insurance
- Indexed Universal Life Insurance
- Guaranteed Universal Life Insurance
- What if I Want Term and Permanent Coverage?
There are two major types of life insurance – term and permanent. Term life insurance is a temporary form of life insurance that protects you for a certain number of years (the term), such as 10, 15, 20, 25, or 30 years. Since most people outlive their term policies, the premiums are much lower than permanent life insurance premiums.
Permanent life insurance is any type of coverage that is designed to be in effect when you pass away. This includes:
- Whole life insurance
- Universal life insurance
- Variable universal life insurance
- Indexed universal life insurance
- Guaranteed universal life insurance
Many permanent life insurance policies have something known as cash value. Each month, a portion of the premium you pay goes to cash value accumulation, which accumulates on a tax-deferred basis. You are typically allowed to borrow from your cash value if necessary, though it is not advised.
How do you decide if you should choose a term or permanent life insurance policy? Like stated earlier, the main difference is how long the coverage lasts – term life policies only provide coverage for a fixed period of time. It’s lower in cost than permanent coverage, but it’s important to note that if you outlive the policy, you won’t receive any of its benefits.
Here some financial obligations that term life insurance would be a good fit for:
- Student loans
- A mortgage
- Income replacement
- A wedding
- To pay off credit cards or other debt
- Provide financial independence
If you’re looking for a policy that you won’t potentially outlive, a permanent policy would be a better option. They’re also a good choice if you have major financial obligations that aren’t necessarily time-sensitive. If you have a large estate that will be taxed after you pass away, a permanent policy could protect your loved ones from having to pay those taxes, and possibly selling your assets if they don’t have enough money to pay for the tax bill.
So what are the options for permanent life insurance? Keep reading to find out.
This is the most commonly known and sold form of permanent life insurance. You’ve probably seen a commercial or two with some famous celebrity endorsing this type of life insurance. But what is it?
Whole life insurance is essentially permanent coverage with a death benefit plus an investment component. Remember the cash value accumulation we explained previously? That applies here. This type of insurance does not require a medical exam when applying, which can be an advantage for some people.
It’s important to note that even though whole life is labeled as “permanent,” coverage typically only extends until age 85. To read more about whole life insurance, check out this article.
Similar to whole life, universal life insurance is also a type of permanent coverage with an investment component. However, unlike whole life, universal life allows flexibility in payments.
Universal life insurance premiums have two components: cash value and a cost of insurance (COI) amount. The COI is the minimum amount of a premium payment required to keep the policy in force. It varies based on the policyholder’s age, insurability, and insured risk amount.
What does this mean? Essentially, if you need to pay a little less on your premium one month or even skip that month for whatever reason, you have the option to – as long as you pay the correct total amount by the end of the year. You can also borrow from your cash value if need be, but we don’t recommend it.
Variable universal life (VUL) is a subcategory of universal life; it also has a death benefit and savings component with flexibility when it comes to payments. With VUL, the savings element consists of separately managed accounts, which are known as sub-accounts.
The sub-account functions similarly to mutual funds. Each have stock and bond accounts, as well as a money market option. If the investments do well, you accrue money. However, if they perform poorly, you lose money, and may have to borrow from the cash value, or pay a higher premium to cover the cost of insurance.
Indexed universal life (IUL) policies are another form of permanent coverage that are tied to the stock market index, such as the S&P 500. They allow the policy holder to decide the percentage of their funds that they’d like to allocate to fixed and indexed portions.
With these types of policies, you’re “participating” in a stock market index with maximum and minimum percentages on your return. Ideally, over time you’ll see a higher return than you would with a traditional universal life policy. They’re generally safer than the average variable universal life policy, but are still risky.
If you’d like to read more about why we don’t recommend IUL policies, check out this article.
Last, but not least, we have guaranteed universal life insurance, also known as GUL. GUL policies are somewhat of a hybrid between term life and whole life insurance; like term, the policies are in force for a certain amount of time. But instead of being in effect for a certain number of years like term, GUL policies go until a certain age, such as 90, 95, 100, 110, 115, or even 121. The average lifespan of an American is 79-years-old, essentially guaranteeing permanent coverage like whole life.
Prices for a guaranteed universal life policy are a bit more expensive than term, but less expensive than whole life insurance. They are by far the safest form of permanent life insurance, due to the fact that there are no investment risks, so the policy cannot be underfunded as long as your premiums are paid each month.
GUL policies are the only type of permanent life insurance that we typically recommend. To guarantee truly permanent coverage, we suggest choosing a policy that expires at age 100 or later (many estate attorneys tell their clients to lock in coverage until 120 to be safe).
- Look for permanent life insurance that includes a term rider. A term rider acts similarly to a term policy in the sense that you can add coverage during the years when you have more financial obligations (like a mortgage or student loans). Term riders aren’t available on all permanent policies, so it’s best to double check with your licensed agent to see if your policy offers it.
- Purchase both a permanent and term life policy. If your permanent policy doesn’t offer a term rider, then the next best thing to do would be to purchase one of each type of policy. By doing so, you can increase your total coverage while saving a little bit of money, versus if you were to just increase your permanent coverage.
- Look into convertible term life insurance. If you believe that you only need term life insurance for now, but are unsure about what you’ll need in the future, see if you can purchase a convertible term policy. These policies give you the ability to convert some or all of your term coverage into permanent coverage later on (without having to re-qualify for coverage). Do note that these types of policies have an age limit by which you can convert – typically after a certain number of years or by a certain age.
Questions? We Can Help!
Deciding which type of policy to go with is no easy task, and we’re here to help.
At JRC Insurance Group, we have helped thousands of families and businesses with their life insurance needs, and we can help you too! Our agency is licensed in all 50 states and we’re independently owned and operated.
As a non-partial, no-fee brokerage, our goal is match our clients with the best life insurance options available by shopping and comparing rates from more than 45 highly-rated insurers. By having access to dozens of companies and their guidelines, we’re able to save our client’s time and money.
Most importantly, our services as completely free, and there is no cost to apply for coverage. Give us a call toll-free today at 855-247-9555, or you can request a free quote online to compare rates and options from dozens of insurance companies in less than a minute.