Permanent life insurance is meant to stay with you for the long haul, not just a decade or two. Because it is designed for lifelong protection, it works differently than term insurance, and it carries a few features worth understanding before you sign on. If you are not planning to keep a policy for many years, permanent coverage may not be the right fit, so it helps to know how it works first.
What Makes Permanent Insurance Different
Most permanent policies, whether called whole life, universal life, adjustable life, or variable life, include something term insurance usually does not: a cash value, sometimes called cash surrender value.
This cash value gives you a few options over time. You can surrender the policy and receive the accumulated cash as a lump sum, though surrendering early in the policy's life often means little or no cash value has built up yet.
If you ever need to stop paying premiums, the cash value may be used to keep some coverage going, either for a limited time or at a reduced amount for the rest of your life, depending on how much value has accumulated.
Many policies also let you borrow against the cash value, using it as collateral. These loans are not generally subject to credit checks, but they do need to be repaid with interest. If a loan is not repaid, your beneficiaries will receive a smaller death benefit.
It is worth remembering that cash value and the policy's face amount are not the same thing. Cash value is what you could access if you surrender the policy. The face amount is what gets paid out at death or at the policy's maturity. How cash values grow can also depend on the insurance company's own experience with mortality, expenses, and investment returns over time.
Common Types of Permanent Policies
Whole life, sometimes called ordinary life, is the traditional form of permanent insurance. It stays in force for your whole life as long as scheduled premiums are paid, and it steadily builds cash value. Some whole life policies pay dividends depending on the insurer's financial results, and those dividends can be used to reduce premiums, buy additional coverage, or purchase term insurance.
Universal life, also called adjustable life, offers more flexibility. After your first payment, you may be able to adjust the timing and amount of premiums within certain limits, and you can often raise or lower the death benefit. Increasing coverage typically requires proof of good health, and decreasing the death benefit does not necessarily lower your premium.
Variable universal life ties cash value and death benefits to the performance of investment options you select within the policy, each carrying its own level of risk. Strong investment performance can increase your values, while weak performance can reduce them. Because of this, you will receive a prospectus when purchasing this type of policy, and some versions guarantee a minimum death benefit regardless of investment results.
Weighing the Pros and Cons
On the plus side, permanent coverage can protect you for your entire life as long as premiums are kept current, premium structures can sometimes be adjusted to fit your budget, and cash value grows on a tax deferred basis that you may be able to borrow against or convert into an annuity.
On the other hand, the premiums needed to keep permanent coverage in force can make it harder to buy a large amount of protection, and if you do not keep the policy long enough, it may end up costing more than term coverage would have.
Questions to Ask Before You Buy
Before committing to a permanent policy, think honestly about whether the premiums fit your long-term budget and whether you can commit to paying them for many years. Surrendering a permanent policy after just a short time is often an expensive way to have had temporary coverage.
Ask to see a policy illustration, which shows projected premiums, death benefits, and cash values. Keep in mind that illustrations are not guarantees. Dividends, interest credits, and investment performance can all cause your actual results to differ from what is illustrated, and only the figures labeled as guaranteed will be honored by the insurer, subject to its financial strength.
Other good questions include whether the illustration reflects current, up to date assumptions, whether your classification (such as smoker status) is accurate, how often premiums are due, which numbers are guaranteed, and whether you will be notified if non-guaranteed figures change. Ask too whether the death benefit itself could change, and whether a policy that appears to become self-supporting after some years could later require you to resume payments.
Riders and Other Policy Features
If a premium payment is missed, policies typically allow a short grace period, often around a month, before anything lapses. After that, some permanent policies can draw on existing cash value to keep coverage in force, though this will reduce the remaining cash value.
Various riders can be added to a policy for an additional cost, where available. A waiver of premium rider may excuse premium payments if you become totally disabled. An accidental death benefit rider adds an extra payout if death results from an accident. Accelerated benefit, or living benefit, riders may let you access some of the death benefit early in cases of terminal or catastrophic illness or long-term care needs. A child rider can add a modest amount of coverage for your children. Availability, costs, and specifics for all riders vary by insurance company and by state, so ask your agent what is actually offered.
Finally, find out exactly when your coverage takes effect, since that date is not always the same as when the policy is issued. Most policies also include a free look period after you receive them, typically about ten days, during which you can review the policy and cancel for a refund if it is not what you expected.
Permanent life insurance involves real tradeoffs, and the right choice depends on your family's goals, budget, and how long you expect to need coverage. Guarantees mentioned in any policy are only as strong as the issuing company's claims paying ability, and features, riders, and costs vary by carrier and change over time, so always confirm current details. This article is general information and not tax, legal, or financial advice. The team at Flynn Insurance Agency in Kings Park is happy to sit down, walk through your options, and help you think through what fits your situation.
This article is general information, not legal, tax or financial advice. Coverage depends on the terms, conditions and exclusions of each policy. Talk with a licensed agent about your situation.
