What’s “Permanent” About This Insurance?
As its name implies, permanent life insurance is insurance you keep for life. It doesn’t expire unless you stop paying premiums. While you buy term insurance to cover you for a specified period of time — to pay benefits if you die before your children graduate from college, for example, or before your spouse is eligible for retirement benefits — you buy permanent coverage to keep permanently. Permanent life policies, most commonly Whole Life and Universal Life , pay cash benefits whenever you die, as long as the policy is in force. Benefits are not limited to a specific term. Additionally, permanent policies accumulate cash value, so you can borrow against or “cash in” the current value of the policy while you’re still alive — to fund your retirement or pay for your children’s education, for example. Of course, these benefits come at a price. Permanent life insurance coverage typically costs significantly more in the early years of the policy than term life for the same amount of coverage, and becomes more economical later.
What Is Whole Life?
Whole Life remains in force your entire life and pays out a cash benefit to your beneficiary on your death whenever it occurs. Thus, it is well-suited to cover needs that do not diminish during your lifetime, and may even grow, such as estate settlement costs and taxes.
Generally, Whole Life premiums don’t change. In a typical term life policy (except for level term), the premiums are lower in the early years, when you’re less likely to die and the insurance company is less likely to have to pay a claim. The premiums – and your risk of death and the insurance company’s risk of having to pay out – go up as you get older. But with Whole Life, the variable costs of insuring your life are averaged out over time.
Whole Life policies develop a cash value that grows on a tax-free basis over the life of the policy. You can access this cash value either by canceling your policy or by borrowing against its current value. Your cash value’s rate of growth depends on a number of factors, including the investment success of the issuing insurance company.
What Is Universal Life?
Universal Life gives you the control over the key elements of your policy: the premium, the life insurance protection, and where the insurance company invests your policy’s cash value. Your financial resources and need for either growth or insurance protection will change over your life. Universal Life insurance gives you the flexibility to tailor these elements of your policy to your current needs.
For example, if finances are tight, you can change the amount you pay in premiums and, in some cases, stop paying premiums altogether. Conversely, if you’re in a good financial period, you can increase your premiums, which will help you to increase the cash value of your policy. If your need for life insurance protection is greater than your need for growth, you can increase your insurance protection and decrease your policy’s cash value. Similarly, if your children are grown and your need for insurance protection has diminished, you can direct more of your premium toward building your policy’s cash value.
With variable universal life, you can control how your money is invested by selecting the financial vehicle — stocks, bonds, mutual funds, etc. — used to build your policy’s cash value from among the insurance company’s offerings.
Is Insurance A Good Choice?
Experts agree that the primary reason to buy life insurance is to protect your dependents if you die. Though Whole Life and Universal Life policies do build cash values, much of your premium is used to fund the insurance element of your policy (the “mortality charge”) . Thus, by comparison with stocks, bonds or mutual funds — where all your money, minus expenses, is invested — life insurance is an inefficient investment.
However, if you are looking for an efficient way to fund your life insurance, Whole or Universal Life can be a smart way to build value. Here is how: Your policy’s cash value can be accessed as cash (through a loan or by canceling your policy) or used within the policy to replace your premiums. Since the cash value grows on a tax-free basis, using your cash value to replace your premiums allows you to use tax-free dollars to maintain your insurance. You get to keep the money you would otherwise have to pay in taxes.
For example, suppose your premium was $1000 and you had to earn $1300 before taxes to pay that premium. You would pay $300 in income taxes plus the $1000 to buy your insurance. However, if you paid the $1000 premium from your policy’s tax-free cash value, you would pocket the $300 you would otherwise have to pay in taxes. Your life insurance policy would, in effect, have earned you an extra $300. However, this example assumes that your chief goal is to fund your life insurance, not earn money through an investment.
Summary: Advantages Of Whole Life Insurance: WHAT IT DOES DO:
Disadvantages Of Whole Life Insurance: WHAT IT DOESN’T DO
Summary: Advantages Of Universal Life Insurance: WHAT IT DOES DO:
Disadvantages Of Universal Life Insurance: WHAT IT DOESN’T DO