Permanent life insurance covers you for the rest of your life and pays out regardless of when you die, as long as you’ve paid your premiums.
It is an umbrella term for life insurance policies that do not expire. Typically, permanent life insurance combines death benefits with a savings portion.
These types of policies also include a savings account called the “cash value component” that you can withdraw or borrow even though you are still alive.
Depending on the policy, you may be able to adjust your premium payment and coverage amount to meet your needs. know about which is Best Homeowners Insurance Companies.
When you die, a life insurance policy will give your beneficiary a tax-free death benefit. You can name one or more beneficiaries in the policy to get benefits.
Permanent life insurance is also known as cash value life insurance as it provides an opportunity to save through a policy on a tax-deferred basis. When you pay your premium for a permanent life policy, some part of what you pay goes towards the cost of the death benefit and the other part goes to the cash value account.
The two primary types of permanent life insurance are whole life and universal life.
Whole life insurance provides coverage for the entire lifetime of the insured. And its savings can increase at a guaranteed rate.
Universal life insurance offers a savings element in addition to a death benefit. But it has a variety of premium structures and earnings based on market performance.
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How Does Permanent Life Insurance Work?
Permanent life insurance usually starts with an application. Once you approved and own a policy, you pay a premium to keep it in force.
Although the death benefit is provided for one day, permanent life insurance is a financial asset while you own it.
Each of these stages of a life insurance policy – application, ownership, and payment of death benefits – has unique characteristics and considerations.
Application
To apply for a life insurance policy, you must submit an application for the amount of coverage you want. Which the insurance company uses to determine your eligibility for the policy and premium.
Applying for life insurance may (or may not) be included in a medical examination. But usually requires a medical history from you and your family. Whether the medical examination requirement is based on the company’s underwriting criteria.
In addition to collecting medical information, insurers can ask about your business, your habits. The reason you want coverage, and other factors that are necessary to assess a company’s risk. It can also request to run to your credit and to check your background and driving history.
Ownership
Once your application is approved, the insurer will confirm coverage and premium.
Before issuing, you can choose to add various riders, or facilities to your policy, such as living benefits for disability or waiver of premium. Riders are optional benefits that increase the premium.
When you have finalized your options, you will pay the agreed premium. A portion of that premium payment goes towards the cost of the death benefit.
Another part goes towards the cash value of the policy and any additional riders or facilities you purchase.
If you have investment options (in the form of a variable life insurance policy), then the amount going in cash value will select in the investment or fixed accounts. Any fees or charges for the policy are taken out of cash value or premium.
You can access the cash value through a policy loan or withdrawal. And if you have purchased alternative riders, such as critical illness, terminal illness, disability, or chronic illness, you can access part of the face value as a “quick”, accelerated death benefit in some circumstances.
Payment of the Death Benefit
The death benefit is paid when you die. Your beneficiary will receive the full value of the death benefit, whether you die in the policy for five years or at the end of a long life.
If your policy has a cash value, your beneficiary will usually not receive the death benefit and the cash value.
However, some policies are designed to pay both face value and accumulated cash value. If this feature is important to you, be sure to discuss it with the insurance agent before purchasing the policy.
Most, if not all, life policies have a contingency period of two years. If you die within the first two years after the policy is issued, the insurer may review your application for material errors and potentially reject your claim.
A claim for death as a result of suicide can also be denied during the claim period.
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Types of Permanent Life Insurance
If you decide that permanent life insurance is the right choice for your needs, then consider what type of permanent life insurance is most appropriate.
1. Whole Life Insurance
The Whole life insurance offers a guaranteed death benefit, a level premium (a premium that does not increase over time), and the ability to create cash values.
Whole life insurance policies have a fixed premium and a cash value component that accumulates (slowly). You can take a loan against the cash value, and if you do not return it, the amount will be deducted from the death benefit.
By participating in Whole Life policies (available with some mutual insurance companies), you can earn an annual dividend, which adds to the value of the policy.
2. Universal Life Insurance
With a universal life insurance policy, you can adjust your premium payments and change the death benefit (although you may have to go through medical underwriting to increase medical costs).
You can also combine cash value with the death benefit to increase payment to your beneficiaries.
The policies also provide a minimum guarantee rate of interest on the cash price. If you do not pay the premium, or the payments are not enough. The policy will reduce the cash value to cover costs, and may eventually be missed.
These types of universal life policies are more expensive than those that do not incorporate cash value with death benefits.
3. Variable Life Insurance
Variable life insurance offers policyholders the opportunity to place their cash value in an investment account managed by the insurance company.
Depending on the type of policy, the premium may be fixed or flexible, and the minimum death benefit may be guaranteed.
A key feature of variable life insurance is the ability to invest cash value. Which typically occurs in various mutual funds through sub-calculations in the policy.
If you invest badly, you do not have the money to put towards the premium, and the death benefit may decrease. However, companies usually guarantee a minimum death benefit to ensure your heirs pass some money.
Due to investment features, policy fees and costs are higher than non-convertible life policies.
4. Guaranteed Issue Life Insurance
Guaranteed issue insurance is permanent life insurance that does not require any medical underwriting.
This type of life insurance has a lot of moving parts. The underlying cash value of the policy is subject to fluctuations of the investment you choose.
You can adjust your premium payment at any time, as long as you are within the minimum and maximum limits of the policy.
However, this increased flexibility comes with risks. If your investment options do not pan the way you expected, you may end up owing money or even lose coverage altogether.
Commonly known as a final expense or burial insurance, it usually provides minimal coverage.