Life insurance decisions usually start with figuring out how much coverage makes sense for your family or business. The next step is deciding what kind of policy fits your situation. Broadly speaking, life insurance falls into two camps, term and permanent. This article focuses on permanent coverage, what it means, and how the two common versions, whole life and universal life, work.
Permanent Life Insurance, the Basics
Permanent life insurance is designed for people who expect to need coverage for a long time, sometimes for their entire life, rather than for a set number of years.
A permanent policy blends a death benefit with a cash value component that builds up over time. Because of that cash value feature, premiums typically start out noticeably higher than what you would pay for term insurance on the same person.
Many permanent policies also allow you to borrow against the cash value that has accumulated, often with favorable tax treatment, though loans reduce the death benefit and cash value until repaid. Rules around this can be detailed, so it helps to review your policy and ask questions before borrowing.
There are a couple of common forms permanent insurance can take, and each comes with its own tradeoffs worth thinking through with an advisor.
Whole Life Insurance
Whole life insurance is built to last your entire lifetime, as long as premiums are paid. Most whole life policies have a level premium, meaning the amount you pay generally stays the same year after year.
Premiums start higher than a comparable term policy, but because they do not increase with age the way renewing term coverage would, whole life can end up costing less over the long run compared to repeatedly renewing term insurance into your later years.
The cash value in a whole life policy tends to grow in a fairly predictable way, which appeals to people who want stability and a long-term planning tool alongside their coverage.
Universal Life Insurance
Universal life insurance also covers you for your lifetime, but it offers more flexibility than whole life. You can often adjust your premium payments and, within limits, the death benefit amount as your needs change over the years.
A portion of each premium payment goes into a cash value account that earns interest. You may be able to borrow against that cash value, but if the account balance drops too low, the policy can lapse.
To keep a universal life policy in force, you may need to resume or increase premium payments, or reduce the death benefit. Many policies are structured so premiums can be paid from the accumulated cash value for a time, but that approach has limits and should be monitored.
Because universal life depends on interest crediting and account performance, it is worth reviewing statements periodically to make sure the policy is still on track to do what you expect.
Weighing Your Options
Term, whole life, and universal life each serve different purposes, and the right fit depends on your timeline, budget, and what you want the coverage to accomplish, whether that is income replacement, estate planning, or leaving a legacy.
This article is general information and not tax, legal, or financial advice. Insurance products, tax treatment, and policy rules can change, and figures or features mentioned by any carrier should always be confirmed directly before you rely on them.
If you are trying to decide between term and permanent life insurance, or want to understand how a whole life or universal life policy would work for your situation, the team at Flynn Insurance Agency in Kings Park is glad to sit down and walk through your options with you.
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.
