A smart part of financial planning is ensuring your loved ones are financially protected in the event of your death. Considering the average cost of a funeral is between $7,000 to $10,000, life insurance can be a valuable investment to make a difficult time a little easier for your family.
All life insurance policies provide a benefit payable upon your death to your family members, which can account for funeral and living expenses. However, there are different life insurance policies available. One that you might want to consider is permanent life insurance.
What is permanent life insurance?
As its name implies, permanent life insurance lasts for the duration of your life. Unlike term life insurance that you buy in increments of time (normally 10, 20 or 30-year blocks), with permanent insurance, you receive the benefits for as long as you live after you buy the policy.
Along with the duration of the benefit, permanent life insurance offers a cash value aspect. How this works is when you make payments on your policy, it accumulates a cash value over time. You can withdraw this cash value to pay for items such as medical expenses or college tuition for your children.
In addition to the cash value benefit, you also receive a death benefit. Similar to other life insurance policies, your family receives a one-time sum or annuity upon your passing. If at any time you decide to cancel the policy, you’ll receive the cash value of it.
What are the pros of permanent life insurance?
Once you buy a policy, you can keep it for the rest of your life. This is beneficial in that you won’t have to worry about renewing it like you would with term life insurance.
Also, with term life insurance, you might have to undergo medical testing, which could raise your rates. You don’t have to worry about that with permanent life insurance.
Moreover, permanent life insurance offers cash value to go along with a death benefit. This gives you an investment vehicle by which you can withdraw the cash value of it if you need the money for unexpected expenses.
What are the cons of permanent life insurance?
As an investment vehicle, permanent life insurance isn’t a more lucrative option. With permanent life insurance policies, you receive a mediocre return on your investment. Given that your premiums are going to be more expensive, it might not be the smartest option for some.
Which types of permanent life insurance policies are available to me?
There are three types of policies. Here’s a look at them:
- Whole life insurance: This is the most popular form because it guarantees you a minimum return in cash value. Your beneficiaries also receive a death benefit upon your passing. In some cases, your policy might provide you with dividends you can cash out or use to pay your policy premiums.
- Universal life insurance: This policy gives you more flexibility through the life of the policy. For instance, you can increase the death benefit or decrease the cost of your premiums once you have built enough cash value.
- Variable universal life insurance: Similar to universal life, you have the flexibility of changing your death benefit at any time. Furthermore, you gain greater flexibility in how you invest your funds, but this could also reduce the death benefit if you incur losses.
Who should buy permanent life insurance?
Permanent life insurance is good for someone in great health who doesn’t want to worry about renewing policies (as you would with term-life) down the road when medical checkups could raise your life insurance rates. Moreover, this type of insurance is also a smart bet if you don’t mind spending more on policies to receive the flexibility of cashing out the value down the road.
How does permanent life insurance work?
With permanent life insurance, there are two components. First, there’s the death benefit that is payable to your beneficiaries when you pass away.
Another aspect of the policy concerns its cash value. As you make policy payments, it accumulates a cash value. You can take out a loan for this cash value to pay for medical expenses and other costs.
However, it’s important to note that any money you withdraw that you don’t repay comes out of your death benefit, leaving your loved ones with less income.
How much does permanent life insurance cost?
Life insurance costs depend on a variety of factors such as your age, gender, how much coverage you want and whether you use nicotine. Some insurance providers also require a medical exam, especially if you decide to purchase a policy with a higher death benefit.
Frequently asked questions
Is term life insurance or permanent life insurance better?
Both are beneficial depending on your priorities. A permanent life insurance policy is going to be smarter for those who are younger who want to lock in their rates for the rest of their lives. Furthermore, permanent life insurance gives you the option to borrow against the cash value of your policy. Meanwhile, term-life insurance is also smart if you’re younger and want to pay less monthly.
What are the different types of permanent life insurance?
There is whole life insurance where you receive a minimum return for your policy payments and your beneficiaries receive a death benefit. With universal life insurance, you have the option of decreasing or increasing your death benefit. Finally, with variable life insurance, you have more control over where you invest your money and the ability to change your death benefit.
How does cash value work?
As you make your payments, your money goes to paying the cost of the premium, the underwriting costs on the insurance side, and then the rest goes into your cash benefit. Over time, this accumulates, allowing you to borrow against your death benefit if you need emergency expenses. If you don’t pay it back when you pass away, the insurance company deducts the cost of the loan from your death benefit.