Permanent life insurance is a policy that you keep for the rest of your life unless you cancel the policy. It is usually bought for estate planning; that is, leaving a lump sum to your beneficiaries. Other key differences are that your premiums usually do not increase and most permanent policies have some cash value.
There are three subtypes of permanent life insurance:
- All life, often considered the “standard” for permanent life insurance. It has a cash value that builds up over time, so you’ll get money back if you cancel, and you’ll likely be able to borrow money from it or use it as collateral for a loan. However, keep in mind that if you do not fully repay what you have borrowed from the policy, this will affect the payout your beneficiaries will receive.
- Universal life insurance and investment account in one. Like life insurance, it has a cash value, but you can also use an investment account, which will affect the value of the policy; invest wisely and your loved ones will reap a greater payout. One caveat is that your premiums may increase if your investment returns are consistently low.
- Deadline-to-100 it is a hybrid of term and permanent life insurance. It provides level cover for up to 100 years but does not offer any cash value. Accordingly, premiums are lower than other types of permanent life insurance.
Term vs. Permanent Life Insurance
Term life insurance policies tend to be less expensive than permanent life insurance policies because most people will outlive the policy and therefore won’t be charged (unless you buy a 100-year term policy). The amount you pay in premiums is determined when you purchase the policy and will remain the same for the life of the policy, but you can expect premiums to increase if and when you renew your policy (after, say, 10 or 20 years) because costs are adjusted as your age increases. Term life insurance is good value for temporary needs and is what most people choose when they still have young families, debt and/or a mortgage.
Premiums for permanent policies are higher because the payout is guaranteed at some point (because everyone dies eventually). But, on the other hand, you can be sure that the premiums will not increase with age or health problems. Therefore, the younger and healthier you are at the time you purchase the policy, the lower the premiums.
Fixed premium life insurance can have some flexibility in that it can be paid either over the life of the policy or over a shorter period by paying an increased amount. Additionally, universal life policies and some whole life policies offer the option to pay more so you can take full advantage of the investment option, a strategy that can be used to increase your final payout or help fund retirement or other income needs down the road life. But, as a rule, it is used by high-income people who are on the edge of traditional tax-free investments. (Find out if life insurance can be used as a fixed income investment.)
Who can be named as the beneficiary of life insurance?
If you are insured, you can name your spouse, children or other dependents, such as a friend or family member or even a charity, as a beneficiary. If you name more than one beneficiary, the insurance company will distribute the death benefit among all the selected beneficiaries. You can also decide what percentage of the payout each beneficiary will receive – for example, 75% to your spouse and 25% to your child.
You can name your estate as a life insurance beneficiary, in which case the death benefit becomes part of your estate and is distributed according to your will. However, this benefit will be subject to property management tax and creditors could potentially require the funds to pay outstanding debts.
With a life insurance policy, the beneficiaries can be revocable or irrevocable. Revoked beneficiaries can be changed at any time without the need to notify them. In the case of irrevocable beneficiaries, you must have written permission to change the beneficiary.