We all hope for a long and happy life, but none of us knows exactly how long we will live. Life insurance can provide peace of mind in knowing that your loved ones and dependents will be taken care of financially, no matter what happens.
If you want to buy life insurance that has guaranteed premiums and will never expire, then you may be interested in permanent life insurance. Like the name suggests, permanent life insurance is a type of policy that lasts the rest of your life.
It provides peace of mind knowing that your premium payments will never increase and your coverage will always be there for your loved ones. It offers unique benefits valuable for those looking for long-term financial security.
In this post, we’ll take a closer look at what makes permanent life insurance different from other types of coverage, its pros and cons, the different types available, and explain why it might be a good option for you.
Read on to learn more.
How Does Permanent Life Insurance Work?
Permanent life insurance is a type of life insurance that provides lifelong coverage, which means it insures the policyholder till they pass away. It is best suited for lifelong protection like caring for a disabled child or dependent, estate tax liabilities, liquidity for closely-held businesses, and end-of-life expenses.
Permanent life insurance from the biggest insurance companies in Canada has two essential features, the death benefit, and cash value. The death benefit is a fixed payout your beneficiaries receive whenever you pass away.
Aside from the guaranteed death benefit payout, permanent life insurance accumulates cash value over time. The cash value grows on a tax-deferred basis. You can borrow against or withdraw from the cash value anytime and for whatever purpose.
If you cancel your policy, the insurance company will pay you the cash surrender value of your policy. The cash surrender value of your policy is the actual cash value minus any surrender fee specified by your insurer.
Types of Permanent Life Insurance
There are four different types of permanent life insurance. The right one for you will depend on your needs and financial goals, the king of payment flexibility you want, and your level of risk tolerance.
Whole Life Insurance
Whole life insurance offers guaranteed death benefits and level premiums. The death benefit and premiums stay the same throughout your lifetime.
The growth rate of your cash value is also guaranteed and set by the insurer. So, if you want a predictable and guaranteed policy, you should consider whole life insurance.
Participating whole life insurance allows you to earn dividends from your policy while you are covered.
Variable Life Insurance
Variable life insurance offers flexible premiums and flexible death benefits. It provides more investment options. You get to decide how your cash value is invested, so the cash value doesn’t grow at a guaranteed rate.
The policy’s cash value is not guaranteed and will fluctuate according to your investment performance. You can allocate your premiums to another separate account and use it to invest in stocks, bonds, or whatever you choose.
Your insurer will debit your cash value account to pay your premiums. Your policy remains active as long as there is enough cash value to cover your monthly premiums. You will be asked to pay your premiums if your cash value is too low; otherwise, your policy will lapse.
Universal Life Insurance
Universal life insurance offers flexibility to adjust your premiums and death benefit to match your current need, though within specified limits.
It also has a cash value component, but the interest on the cash value can vary. The cash value growth is tied to your investment performance, but it won’t go below a set minimum. So, if your investment doesn’t perform well, you will be asked to pay premiums to keep your policy active.
Also, you can take money from your policy’s cash value as a loan and pay your premiums.
Variable Universal Life Insurance
This type of permanent life insurance combines the features of variable and universal life insurance. You get to decide how your premiums are invested and can adjust your premium payments and death benefits.
It allows you to diversify your investments to earn a higher return, but you will be at risk as you can’t predict the market performance. So if you want maximum flexibility, you should consider variable universal life insurance.
What is the Difference Between Permanent Life Insurance And Term Life Insurance?
The difference between term and permanent life insurance is clear and easy to understand. Term life insurance offers coverage for a specific period of time, and the benefits are paid only if you die within the specified period.
You have to renew the policy every time it expires. Usually, the policy terms are renewed in increments of ten years, but you can pick the specific years of coverage you desire. Term life insurance is less expensive, but each renewal comes with increased premiums.
Term life insurance does not have an investment or savings component, which is peculiar to a few types of permanent life insurance.
In contrast to term life insurance, permanent life insurance offers coverage for an unspecified amount of time. The policy pays out a death benefit to your beneficiaries whenever you pass away, as long as you pay your premiums and don’t cancel your policy.
Permanent Vs Whole Life Insurance
Most Canadians refer to whole life insurance as permanent life insurance because whole life insurance implies that you are covered for your lifetime. However, whole life insurance is just a type of permanent life insurance, and there are other types you can choose from.
Many Canadian insurance companies offer universal life insurance and term-to-100 life insurance. You can choose to buy whole life insurance or any other type of permanent life insurance.
The significant difference between the types of permanent life insurance is the investment component and allowing the insurer to manage the investment or actively running it yourself.
Benefits and Downsides Of Permanent Life Insurance
Like every other type of life insurance, you should consider the pros and cons of permanent life insurance before making any decisions.
- Tax-free death benefit: Permanent life insurance offers a death benefit payout that is usually tax-free. Even the cash value grows tax-free. When you withdraw from the policy’s cash value, the money won’t be taxed, as long as the money is not more than the amount you have paid.
- Lifelong coverage: Permanent life insurance offers you insurance that never expires. While term life insurance only covers you for a specific term, permanent life insurance covers you throughout your lifetime. You don’t need to worry about your policy expiring or renewing your policy.
- Cash value feature: Permanent life insurance allows you to grow a part of your premiums with the cash value feature. A portion of your monthly premiums go into the cash value and grows over time. The insurance company invests the money, and you earn interest on a tax-deferred basis. This means you don’t pay taxes on the interest until you start withdrawing it. You can borrow against or withdraw from the cash value. However, withdrawing without repaying can reduce your policy’s death benefit.
- No renewals: Term life insurance has to be renewed at the end of each policy term to keep the coverage going. Most times, you might have to do another medical exam to prove your insurability and may pay higher premiums. In contrast, with permanent life insurance, you don’t have to worry about renewing your policy. Your policy never expires. Also, you only take one medical examination.
- Premiums don’t change: With term life insurance, your premiums would increase every time you renew your policy. Permanent life insurance offers guaranteed and consistent premiums from when you buy the policy until you die or stop making payments.
- More expensive: The major drawback of permanent life insurance is its cost. Generally, permanent life insurance is more costly than other forms of life insurance. This is because the policy lasts forever and has a cash value feature. You should expect to pay five to fifteen times more premiums than term life insurance.
- It may not be a good investment tool: Permanent life insurance offers a cash value component that serves as an investment and savings vehicle. However, this may not be the best option for investment, especially if you have other investment options. You have little control over this investment, the rate of returns is lower, and investment fees are higher than other investments.
Why Should You Buy Permanent Life Insurance? Is It Worth It?
Permanent life insurance may not be the best choice of life insurance for everyone, especially if you are looking for an affordable policy.
However, if you want to leave your loved ones with money to preserve their quality of living, and want your beneficiary to receive a death benefit regardless of when you die, then permanent life insurance is a perfect fit.
If you have maxed out other investment options and are looking for a tax-deferred savings account, you can consider permanent life insurance.
Permanent life insurance provides lifelong coverage and a cash value component. Though, these do not come at a cheap rate. You will pay five to fifteen times more premiums than term life insurance.
Final Thoughts on Permanent Life Insurance
Permanent life insurance is a critical piece of financial planning that can provide peace of mind for you and your loved ones. Having the right coverage in place is vital so you can rest assured knowing your family will be taken care of financially if something happens to you.
If you have questions about permanent life insurance and deciding whether to buy it or not, speak to an expert insurance advisor. We would be happy to discuss the options available and help you find the policy that best meets your needs.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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