Life insurance is a crucial financial safety net for your loved ones and dependents, offering protection in the event of your passing. If you’re searching for a life insurance option that will cover you for your entire lifetime, permanent life insurance is a compelling choice.
Permanent life insurance, as the name suggests, is a policy designed to provide coverage throughout your entire life. However, it’s essential to note that it comes at a higher cost when compared to term life insurance.
In this blog post, we will delve into the distinctive features of permanent life insurance, contrasting it with other coverage options. We will also explore its advantages and disadvantages, the various types available, and provide insights into why it may be a suitable choice for you.
What is Permanent Life Insurance, and How Does Permanent Life Insurance Work?
Permanent life insurance is a unique type of coverage that ensures lifelong protection for the policyholder until their passing. It proves to be the most suitable choice when you need long-term security, such as caring for a disabled child or dependent, managing estate tax obligations, ensuring liquidity for closely-held businesses, or covering end-of-life expenses.
When you opt for permanent life insurance from Canada’s leading insurance providers, you gain access to two crucial features: the death benefit and cash value. The death benefit guarantees a fixed payout to your beneficiaries upon your passing.
In addition to the guaranteed death benefit, permanent life insurance builds cash value over time, all of which grows on a tax-deferred basis. The cash value offers flexibility; you can borrow against it or withdraw for any purpose.
If, for any reason, you decide to cancel your policy, the insurance company will provide you with the cash surrender value of your policy. This value is the actual cash amount, reduced only by any surrender fee stipulated by your insurer.
Types of Permanent Life Insurance
There are four distinct types of permanent life insurance, each catering to different needs, financial objectives, payment flexibility preferences, and risk tolerance levels.
Whole Life Insurance
Whole life insurance is characterized by guaranteed death benefits and consistent premiums. The death benefit and premiums remain unchanged throughout your lifetime, providing high predictability.
Moreover, the growth rate of your cash value is also guaranteed and established by the insurer. If you seek a policy with a dependable and guaranteed structure, whole life insurance is an excellent choice. Participating whole life insurance even allows you to earn dividends from your policy while maintaining coverage.
Variable Life Insurance
Variable life insurance offers flexible premiums and death benefits. It provides a broader array of investment options, granting you the authority to determine how your cash value is invested. Consequently, the cash value doesn’t grow at a fixed rate, and its performance is linked to your investment choices.
The cash value in this type of policy is not guaranteed and will fluctuate based on your investment performance. You can allocate your premiums to a separate account and invest in stocks, bonds, or other options of your choosing.
Your insurer deducts your premium payments from your cash value account, ensuring your policy remains active as long as there is enough cash value to cover your monthly premiums. If your cash value falls too low, you’ll be required to make premium payments; otherwise, your policy may lapse.
Universal Life Insurance
Universal life insurance offers the flexibility to adjust your premiums and death benefit to align with your current needs, albeit within defined limits. It also includes a cash value component, but the interest on the cash value can vary. While the cash value’s growth is linked to your investment performance, it won’t drop below a specified minimum threshold.
If your investments underperform, you may need to pay additional premiums to keep your policy active. Furthermore, you can leverage your policy’s cash value by taking out a loan to cover your premiums.
Variable Universal Life Insurance
This type of permanent life insurance combines the characteristics of both variable and universal life insurance. You retain the power to determine how your premiums are invested and the flexibility to adjust premium payments and death benefits.
This insurance type allows you to diversify your investments, potentially earning higher returns. However, it comes with the inherent risk associated with market performance. If you seek maximum flexibility, variable universal life insurance is a suitable choice, though it involves a level of unpredictability due to market fluctuations.
Permanent Vs Term Life Insurance
The difference between term and permanent life insurance is straightforward and easily comprehensible. Term life insurance provides coverage for a specific duration, with benefits paid out only if your passing occurs within that defined period.
For term life insurance, you must renew the policy upon expiration. Typically, renewals happen in ten-year increments, although you can choose your preferred coverage duration. While term life insurance is more cost-effective, each renewal comes with higher premiums.
It’s essential to note that term life insurance lacks an investment or savings component, a feature unique to certain types of permanent life insurance.
In contrast, permanent life insurance provides coverage for an indeterminate period. This policy disburses a death benefit to your beneficiaries upon your passing as long as you consistently pay your premiums and refrain from cancelling your policy.
Permanent Vs Whole Life Insurance
In Canada, the term “whole life insurance” is often used interchangeably with “permanent life insurance” because it implies lifelong coverage. However, it’s essential to understand that whole life insurance is just one variant of permanent life insurance, and there are alternative options available.
Numerous Canadian insurance providers offer whole life insurance, universal life insurance, and term-to-100 life insurance. You can choose the type of permanent life insurance that aligns with your preferences.
The key difference among these varieties of permanent life insurance lies in the investment component and deciding whether you want the insurer to manage your investments or prefer to take an active role in managing them yourself.
Benefits Of Permanent Life Insurance
- Tax-Free Death Benefit: One significant benefit of permanent life insurance is the tax-free nature of the death benefit payout. The cash value also grows tax-free. When you withdraw from the cash value, they remain untaxed as long as the amount withdrawn does not exceed the total premiums paid.
- Lifelong Coverage: Unlike term life insurance, which offers coverage for a specific term, permanent life insurance ensures lifelong protection. There’s no need to be concerned about policy expirations or renewal hassles.
- Cash Value Feature: Permanent life insurance allows you to accumulate a portion of your premiums within the cash value. Over time, this cash value grows as the insurance company invests the funds, and you earn interest on a tax-deferred basis. Taxes on the interest-only apply upon withdrawal. You also have the flexibility to borrow against or withdraw from the cash value, though withdrawals without repayment can diminish the policy’s death benefit.
- No Renewals: With term life insurance, you may need policy renewals at the end of each term, often requiring additional medical exams and potentially higher premiums. In contrast, permanent life insurance offers a hassle-free experience, as your policy never expires, and you undergo a single medical examination.
- Premium Stability: Permanent life insurance ensures that your premiums remain constant from the moment you purchase the policy until your passing or the cessation of premium payments.
Drawbacks of Permanent Life Insurance
- Higher Cost: The primary downside of permanent life insurance is its cost. Generally, it is more expensive than other life insurance forms due to its perpetual coverage and cash value feature. Expect to pay five to fifteen times more in premiums than term life insurance.
- Limited Investment Potential: While permanent life insurance includes a cash value component that can serve as an investment and savings vehicle, it may not be the most lucrative investment option, particularly if you have other investment opportunities. Your control over this investment is limited; the rate of return tends to be lower, and investment fees are higher than alternative investments.
Is Permanent Life Insurance A Good Investment?
Permanent life insurance may not suit everyone, especially those seeking a more budget-friendly policy. However, if you want to ensure financial security for your loved ones and guarantee a death benefit payout regardless of when you pass away, then permanent life insurance becomes an ideal option.
If you’ve already maximized your other investment opportunities and are looking for a tax-deferred savings vehicle, permanent life insurance might be worth considering.
Permanent life insurance provides lifelong coverage and incorporates a cash value component. However, it’s essential to acknowledge that these benefits come at a higher cost, requiring you to pay premiums that are typically five to fifteen times more than what you’d pay for term life insurance.
Final Thoughts on Permanent Life Insurance
Choosing between permanent and term life insurance hinges on your unique needs and financial goals.
If you’re seeking lasting security and a policy offering both lifelong coverage and a cash value component, permanent life insurance could be the right fit. However, it’s vital to remember that it comes at a higher cost.
Before deciding, please contact a qualified insurance advisor who can provide tailored guidance to suit your specific circumstances. Make an informed choice that aligns with your financial future because when it comes to your peace of mind and your family’s well-being, it’s a decision that truly matters.