Permanent life insurance
Permanent life insurance allows you to build savings over time. You can withdraw, invest, or use it to borrow against these savings. You can also use it to pay insurance premiums.
A portion of each insurance premium is applied to an account, known as the cash value. The cash value increases at a fixed or variable interest rate. Some policies tie growth to indices, such as the S&P 500 or subaccounts of your choosing. Subaccounts are invested in stocks, bonds, or both. Your cash value could go up or down, depending on the performance of your subaccounts.
It could take several years for a policy to accumulate cash value. You may have to pay a surrender fee if you withdraw the money early. And if you withdraw more money than you paid in insurance premiums, you’ll probably have to pay taxes on this money. If you withdraw the full cash value, the company could cancel your policy. If this happens, coverage will end and could affect your taxes.
Permanent life insurance premiums are higher than term life insurance premiums. That’s because of the savings features and because you’re buying coverage for a longer period. But if you buy a permanent life insurance policy at a young age and keep it, chances are your insurance premium will be cheaper than a term life insurance premium you buy when you’re middle-aged or older. . This is because insurance premiums are based on your age when you purchase the policy.
Types of permanent life insurance
The two most common variations of permanent insurance are ordinary life insurance (whole life insurance, for its name in English) and universal life insurance.
Ordinary life insurance
Remains in force throughout your life, unless you collect the value of the policy or stop paying insurance premiums.
Some regular life insurance policies may pay an annual dividend. You can receive the dividend in cash, add it to the cash value of your policy, or use it to pay insurance premiums. Dividends are not guaranteed. Your dividend could be lower than the company’s projection. Before buying a policy, ask for the company’s projected dividend history compared to dividends that were paid.
Universal life insurance
Stays in force until your maturity date, which is generally when you reach age 95 or 100 as long as you have $1 or more in cash value. On the maturity date, coverage ends and you receive the cash value.
Universal life insurance is more flexible than ordinary life insurance. You can change the amount of your death benefit insurance premium. But any changes you make could affect how long your coverage lasts. If your insurance premiums are lower than the cost of insurance, the difference is taken from the cash value. If the cash value reaches zero, your policy could be voided.
The company will send you an annual report with the amount of your cash value and how long the policy can last. The estimate is based on the amount of the cash value, as well as the cost of insurance and other factors. Regularly review the report. You may have to pay more in insurance premiums to keep the policy in force until the maturity date.
Most universal life insurance policies earn a guaranteed minimum interest rate on cash value. Variable universal life insurance policies depend on the performance of the subaccounts you choose. Agents selling variable life insurance in Texas must have a federal securities license and a state insurance license.
Some universal life insurance policies contain a no-lapse guarantee. If your insurance premium payments are not enough to cover the cost of insurance, the no-expiry insurance guarantee prevents the policy from expiring. You must pay your insurance premiums on time for the guarantee to apply.
Other types of life insurance
These types of life insurance provide only specific coverage:
- Credit life insurance pays the balance of a loan in the event you die before repaying the loan. Banks and other lenders may require that you purchase a credit life insurance policy as a condition of a loan.
If you already have a life insurance policy, you may not need credit life insurance. Instead, you can assign part of the death benefits to the lender to pay off the loan balance.
- Prepaid funeral expenses insurance pays for funeral expenses. An advantage of this insurance is that it fixes the costs of the funeral at prices. Funeral expenses insurance can be expensive compared to other types of life insurance. The amount you pay in insurance premiums often exceeds what the policy pays out when you die. Also, many policies will not pay the full amount of funeral expenses if you die before paying the required amount. A regular life insurance policy or savings program may be a better option to pay for funeral costs.