Permanent Life Insurance: Right for You?
There are two major forms of life insurance — temporary or term life, and permanent or whole life/universal life insurance. Term insurance is for a given period of time, usually 10 to 30 years. Twenty-year term life insurance is most common. Term insurance is generally cheaper than permanent alternatives. Once the term period is ended, the coverage also ends. If you pass away prior to the term ending, your beneficiaries get the face value of the policy to help cover final needs.
Permanent insurance, however, provides lifetime coverage and consists of a savings or investment portion and an insurance part. Permanent policies also are known as cash value insurance.
An important feature of permanent insurance is that you can take a policy loan by borrowing against your cash value. Face value is the amount of insurance you have bought that your beneficiaries will receive. Cash value is the accumulated savings that you can access in the future. Interest rates offered by insurers are comparatively lower than prevailing market rates.
Whole and universal life insurance are designed to exist until you actually leave this earth. This dramatic increase in the likelihood that the insurance company will be responsible for paying a death benefit means it charges more in premiums.
Whole life caters to long-term goals — it offers consistent premiums and guaranteed cash value accumulation. Universal life insurance offers flexibility in premium payments, death benefits and the policy's savings element. There are appropriate uses for each kind of insurance.
A major benefit of whole life is that premiums have the capability of growing as cash value over the life of the policy — and they're accessible. What's more, this growth is generally tax-deferred. But if you don't touch this cash prior to passing, your family members get the disbursement in addition to the face value of the certificate.
Some universal policies allow for limited equity investing, but whole life policies invest excess premiums at the insurance company's discretion. It's best to purchase whole life at a younger age to secure lower premiums, but they will always be higher than term insurance.
With universal coverage, you can build up cash value, too. With universal life, also known as adjustable life insurance, you can make premium payments at any time you wish and in any amount you wish — it has flexibility built in. However, if you stop making payments or withdraw built-up cash value, it will impact your coverage amount, which may mean you'll need to put more cash in or surrender the policy.
But if you make your payments, they go into an investment product — anything from stocks and bonds to mutual funds or annuities. Options vary widely from company to company based on their investment philosophies and what they want to make available to policyholders. This is why it's critical to find a company and policy that align with your investing preferences. If you find such a match, an investment-oriented universal life policy provides the potential for better return than you'll see in a whole life policy. Of course, it may present greater risk as well.
There can be a bewildering array of life insurance choices. Think about your needs and consult with a professional before making a decision.