Permanent life insurance

Permanent life insurance

Permanent life insurance doesn’t expire after a specific term, making it a good choice if you want to leave money to your kids, cover estate taxes, fund a charity, or ensure additional financial security for your loved ones. Permanent policies include an investment portion, referred to as the cash value. Premiums on permanent policies are higher than term premiums. A portion of each premium covers the cost of the life insurance and other policy expenses; the rest is credited to the cash value.

The life insurance cost is low at first, so most of the premium will be credited to the cash value in the early years. Less and less of the premium is credited to cash value as the cost of insurance increases with age. In most cases, if you pay enough premiums into your policy over a long time period, the cash value will be large enough to cover future premiums. Table 8-1 shows the three primary types of permanent life insurance policies and compares some of their features.

Table 8-1 Permanent Life Insurance Policies

Policy Type	Premiums	Returns on Investment
Whole life	Level premiums for life	Similar to long-term bond returns
Universal life (UL)	Can increase, decrease, and even skip premiums	Similar to money market investments or 3- to 5-year U.S. Treasury bonds
Variable universal life (VUL)	Can increase, decrease, and even skip premiums	Feature a separate account in which you choose among subaccounts, similar to mutual funds; returns depend on what you select, though additional fees for subaccount managers make costs in a VUL higher than in other permanent policies

For most permanent policies, you can borrow against the cash value; any loans outstanding at time of death are deducted from the proceeds. UL policies allow you to withdraw from your cash value with no interest charges.

Unlike whole life policies, UL policies are completely transparent, meaning that the cost of insurance, expenses, and investment earnings are disclosed. And you can change the face value. Decreasing the face value is simple, but increasing the policy requires proof of insurability. In addition, you can select between two death benefit options:

• Option 1 (or A): The death benefit remains level.
• Option 2 (or B): The death benefit increases with the cash value. Permanent policies are complex, so be sure to work with an agent who can help you understand the policy type that’s best for your situation.