Permanent Life Insurance is designed to provide protection for your lifetime. This type of policy stretches the otherwise increasing cost of insurance over your lifetime. Your excess premiums are invested by the company and generate a savings element that varies among companies and policies.
Cash value can be obtained while the policyholder is alive. There are many types of permanent life insurance, such as Whole Life, Universal Life, Variable Life and Survivorship or Second to Die Life Insurance. These options provide flexibility to the insured regarding the death benefit, premium amounts and cash value.
Whole-Life policy pays a death benefit no matter when the insured dies. In most cases, the policy will guarantee the death benefit. The premiums are usually much higher than a term policy and the full premium must be paid each year. Whole-Life policies have cash value.
The difference between the premium and the actual cost of the insurance is put into a special account, known as the cash-value account. This cash-value account may be used to help the insured pay the “fixed” premium payments in later years.
The policy owner may borrow against the cash value or receive the cash value if the policy is canceled. There may be charges associated with borrowing against the cash value or canceling the policy before the death of the insured. At death, the beneficiary only receives the death benefit, not the death benefit and the cash value.
Whole-Life works well for those who want a guaranteed death benefit no matter how long the insured lives, and who have enough money to pay the premiums.
Universal – Life policy is similar to a Whole-Life policy. However, a Universal-Life policy gives the policy owner the choice of changing the premium and even the death benefit. For example, the owner may decide to double the premium paid one year. The extra money will go in the cash-value account. Another year, the owner may decide not to pay any premium, and use the money in the cash-value account to pay the costs for that year.
There are some limits to the changes that can be made. The policy owner needs to be careful not to pay too little, and end up with no cash value. If this happens, and the owner still wants the insurance, he or she will need to buy a new policy.
Some policies allow the beneficiary to receive both the death benefit and the cash-value account at the death of the insured. Be sure to read the policy closely as some only pay the death benefit.
Universal-Life works well for people who want lifetime coverage with added flexibility.
Variable Universal Life
Variable Universal Life policy is a special type of universal policy. It allows the cash-value account to grow tax-free and be invested in the stock funds, bond funds, and other assets (much like mutual funds). These funds may allow the cash value to grow at higher rates than fixed-rate Whole-Life or Universal-Life policies.
The down side is that these funds may also have losses. Many Variable policies also offer a fixed account with a low guaranteed interest rate as one of the options. If the returns are low (or negative) then the owner may need to pay more premiums to keep the policy.
A Variable Universal-Life policy is for people who want lifetime coverage, and who can tolerate risk.
Survivorship or Second to Die Life
Survivorship or Second to Die Life Insurance policies are often used to provide money for the payment of estate taxes or to provide liquid funds to descendants of a married couple at the death of the second spouse. No insurance proceeds are paid on the death of the first spouse, and the premium payments continue until the death of the second spouse.
Survivorship policies can also be purchased among a number of siblings, and operate on the same principle. Because Survivorship Insurance is based on a minimum of two lives, it is less expensive than a single-life insurance policy.
Survivorship Life Insurance also is useful to obtain more favorable premiums when one spouse has a medical history that would prevent his or her insurability at reasonable rates. These policies are often used in conjunction with individual or corporate estate and gift planning strategies.
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