My favorite “product” when it comes to insurance is universal life insurance, which is the broader category of permanent life insurance. Permanent life insurance is a wide category that includes many different products and terms such as: universal life insurance, whole life insurance, variable life insurance, and numerous other subset names. I find this topic so interesting because of the endless possibilities you can use permanent life insurance, and not just for paying debt and covering funeral expenses. We are talking about supplementing retirement income and potentially growing your wealth all while covering the basic purposes of life insurance. My only disclaimer to this blog and permanent life insurance is that life insurance is not an investment to make money. There are certain features of life insurance that include similar benefits as investment products, but the main purpose is life insurance.
So, we have talked previously about term insurance and the role it can play in your life insurance strategy. The only negative that was discussed about term insurance is that it only lasts for a specific amount of time and then it expires. Today, I will discuss permanent life insurance, the different types, and some of the benefits of these policies. Hopefully this will serve as a good reference to permanent life insurance so you can feel more comfortable when talking about life insurance.
First, let’s look at the most common types of permanent life insurance which you may have heard of before:
- Whole life insurance – it is exactly what it sounds like, a life insurance policy designed to last your entire life. The most common variations have to deal with your payment plan, “whole life 65” is most likely a policy designed to last your whole life and you pay premiums until age 65. The pay periods are usually broken up into a time period of payments or a target age of payments. These policies used to be designed to last until age 100, but within the last decade due to changing mortality rates, most policies are designed to last until age 121 now.
- Variable life insurance – this term is probably more common amongst the older generations because companies are shying away from these types of products. Variable policies were really big in the 80’s and 90’s because they were tied to the stock market, but you could buy life insurance that was promising 12% return on your money. The problem was that the life insurance aspect depended on the 12% returns in the policy as well and when the stock market cooled down and went through a crash, people’s life insurance policies, similar to their mortgages, went underwater. I will further explain this in the post.
- Universal life insurance – this is the new and very improved variable life insurance. Variable life insurance was risky because it was directly tied to the stock market and if offered major returns. Now, universal life insurance is tied more to bonds and doesn’t highlight major returns on money, it just offers a benefit that can grow your cash.
Now that you have a better understanding of the different types of permanent insurance, I’m going to give you a list to that breaks down the features of permanent life insurance. You can consider this my list of benefits:
- Permanent death benefit – whether it is whole life or universal life insurance, when the plan is properly designed and funded it will pay out a death benefit. Unless, you live to be 122 years old of course.
- Flexible premium payment options – term life insurance is a set annual amount, similar to your car insurance. When you don’t pay your term life insurance on time the policy will cancel. With whole life insurance, and even more so with universal life insurance, it is okay if you miss a payment here and there. Now, when you don’t pay according to the plan you set up the overall performance of the policy will be affected. Conversely, if you find yourself with a little extra cash one month, you can put it towards your life insurance policy, essentially over-funding it. You are probably wondering how over-funding or missing a payment works.
- Cash Value – this is the best part of permanent life insurance. Cash value is essentially the differentiating factor between term insurance, whole life, and universal life. Term has zero cash value, whole life has minimum cash value, and universal life insurance is designed to accumulate cash value. In terms of whole life insurance, you may say you want this death benefit when you die. The insurance company factors everything in and says that will cost you this much premium and you decide how that premium is paid over a certain time frame. Cash value will accumulate over the beginning years of the whole life policy in order to keep paying the premiums even after you have personally stopped paying.
- Universal life insurance’s endless possibilities – while whole life insurance accumulates and then uses cash value to keep paying premiums, universal life insurance lets you use the cash value. As I mentioned before, universal policies are usually tied to the bond market and therefore will offer an interest rate for your cash value. Currently, most companies are offering around 4% (which is a lot better than a bank right now) and they usually guarantee that their rate won’t go below 3.25%. So, while you pay for your life insurance, you accumulate cash value, which in turn is working for you at a given interest rate. Because life insurance is paid for with after-tax dollars all of the interest that you accumulate in your policy is tax deferred and just keeps compounding. It usually takes about 10 years, depending on the policy, but you will see that the cumulative amount of premium will equal the cash value- meaning after 11 years if you decided you no longer need that insurance you could get your money back. Obviously, it is not designed to get your money back and you should see what you could do with cash value after 20 years of paying premium.
The goal of this blog was to give you a better understanding of what is out there in terms of life insurance products. Term insurance is the most common, but also most commonly does not pay a death benefit. If you have any questions and would like to see how permanent life insurance could play a role in your game plan please reach out to your Bridge First Insurance Agent.
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Dave has accumulated extensive knowledge of commercial insurance and the skill set that it takes to succeed. In 2013, he and co-founder Jack Cordes, joined forces to establish Bridge First Insurance. Through Bridge First Insurance, Dave utilizes his knowledge and unique expertise to offer clients the best care in insurance.