BASIC TYPES OF LIFE INSURANCE
As we mentioned in our last post, there are two main groups of life insurance policies: term and permanent. Although we at Rowling & Associates tend to prefer term life insurance for a few different reasons, permanent life insurance comes with its own benefits as well.
PERMANENT LIFE INSURANCE
Permanent life insurance policies are sometimes referred to as whole life insurance. Unlike term policies, these don’t have a specific end date; they will last as long as you make payments. If you die while the policy is in place, it will provide your named beneficiary with a set amount of money. The premiums for permanent policies go toward both the death benefit and building cash value. This is a good benefit because it allows the policyholder to withdraw cash from the policy to meet other needs in their life such as covering medical expenses.
Permanent life insurance policies also come with tax benefits. Because the cash value generally grows on a tax-deferred basis, the policyholder will not have to pay taxes on these earnings so long as the policy is active. The policyholder also has the ability to take money out of their policy without being subject to taxes, so long as the withdrawal amount is up to only the total of premiums paid. This is because policy loans are usually not considered taxable income.
Different Types of Permanent Policies
There are a few subgroups within the category of permanent policies. The first of these is “traditional whole life insurance”. Under this type of policy, the premium and the amount of the benefit remain level, meaning that if the premium costs rise, the benefit will rise by the same amount. So, because premiums are often determined in part by age, this type of insurance will likely become more expensive as you get older. This policy provides a set amount to beneficiaries upon the policyholder’s death, regardless of how long the policyholder lives.
The second is “universal life insurance”. Under this type of policy, the policyholder has the flexibility to increase the amount of the benefit as they choose. This policy also includes a “savings vehicle”. Similar to a savings account, this insurance policy can accumulate cash value, which earns interest based on the current market or minimum interest rate. The policyholder has the ability to access part of this cash value without impacting the death benefit. However, you should make note that if you do this, you will pay taxes on the withdrawals made from the extra cash value. Premiums for universal policies tend to be lower than most permanent policies, closer to those of term life insurance.
The third subgroup of permanent life insurance is “variable life insurance”. Under this policy, policyholders have the option for investment opportunities with bonds, money market accounts, or stocks. These come with more risk than other policies and may have a higher cost as a result.
Permanent Life Insurance Positives
There are many benefits to choosing a permanent life insurance policy. First, you can purchase as much coverage as you need for your specific situation. This can also prove to be cost-effective over the course of a lifetime, particularly if you start while you are young and in good health. Finally, a permanent life insurance policy can help you to earn investment income during retirement with few tax consequences.
Who benefits the most from permanent policies?
As I mentioned above, people who are young and healthy benefit from starting one of these policies while the premium will be lower. If you want to have insurance throughout your entire life, a permanent policy may be a better choice because you won’t have to worry about renewing it constantly and risking an increased premium. These policies are also helpful for those who are interested in earning money back.
As we have said before, there is a lot of work that goes in to choosing the best life insurance policy for you. Hopefully, this brief series of posts has helped you to better understand some of the options out there. If you are still uncertain how to go about making this decision, we highly recommend working with a fiduciary advisor. Fiduciaries are legally obligated to work in your best interest, which means they will undertake a thorough examination of your goals and current financial situation before making any recommendations. Please feel free to contact our planners if you are interested in life insurance analysis.