Permanent Life Insurance

Term Life Insurance Is Always Better Than Permanent Insurance, Isn’t It?

Buy term and invest the difference; this is what most of the “experts” tell us to do. But is it as cut and dry as that, and is this always good advice? Most people who followed this advice, recently lost most if not all of their gains for the past ten years. If they had followed the ‘turtle’ principal, slow and steady wins the race, I venture to say, most would be much happier today.

Permanent insurance provides lifelong protection, and the ability to accumulate cash value on a tax-deferred basis. Unlike term insurance, a permanent insurance policy will remain in force for as long as you continue to pay your premiums. Because these policies are designed and priced for you to keep over a long period of time, this may be the wrong type of insurance for you if you don't have a long-term need for life insurance coverage.

Why would someone need coverage for an extended period of time? Because contrary to what a lot of people think, the need for life insurance often persists long after the kids have graduated college or the mortgage has been paid off. If you died the day after your youngest child graduated from college, your spouse would still be faced with daily living expenses. And what if your spouse outlives you by 10, 20 or even 30 years, which is certainly possible today. Would your financial plan, without life insurance, enable your spouse to maintain the lifestyle you worked so hard to achieve? And would you be able to pass on something to your children or grandchildren? So while straight term insurance may be preferable for the majority of people and the only affordable option, there are many reasons why more and more people are opting for permanent protection they won’t outlive.

These include:

Individuals who still have someone depending on their income, whether it’s a spouse, grandchild or a special needs son or daughter.

Individuals who want to ensure there’s enough money to pay off their debts or provide a tax-advantaged inheritance for their heirs after they die.

Those who don’t like the idea of paying for term with nothing to show for it after the policy expires.

Permanent life insurance offers an attractive combination of life insurance and tax-advantaged retirement income.

Whole life policies pay guaranteed rates that are well above comparable duration CD’s and there is no taxation on the growth of cash values (taxed upon withdrawal of gains only, not the face amount).

Premiums remain constant over one’s lifetime. When a term policy expires and there is still a need for insurance, premiums for a new policy will be much higher.

New features on certain types or UL provide extra upside profit potential, without the downside risk and a guaranteed rate of return of 3, 4, or 5%.

You may be able to reduce or stop paying your premium at some point, and your insurance coverage will still be there.

You could borrow from the cash values to supplement your income, pay off your mortgage, or fund long term care expenses. You could even use the money to pay for a grandchild’s college education.

Cash Value – A Key Feature

Another key characteristic of permanent insurance is a feature known as cash value or cash-surrender value. In fact, permanent insurance is often referred to as cash-value insurance because these types of policies can build cash value over time, as well as provide a death benefit to your beneficiaries.

Cash values, which accumulate on a tax-deferred basis just like assets in most retirement and tuition savings plans, can be used in the future for any purpose you wish. If you like, you can borrow cash value for a down payment on a home, to help pay for your children's education or to provide income for your retirement. When you borrow money from a permanent insurance policy, you're using the policy's cash value as collateral and the borrowing rates tend to be relatively low. And unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit and cash-surrender value.

If you need or want to stop paying premiums, you can use the cash value to continue your current insurance protection for a specified time or to provide a lesser amount of death benefit protection covering you for your lifetime. If you decide to stop paying premiums and surrender your policy, the guaranteed policy values are yours. Just know that if you surrender your policy in the early years, there may be little or no cash value.

Cash Value vs. Face Amount

With all types of permanent policies, the cash value of a policy is different from the policy's face amount. The face amount is the money that will be paid at death or policy maturity (most permanent policies typically "mature" around age 100). Cash value is the amount available if you surrender a policy before its maturity or your death. Moreover, the cash value may be affected by your insurance company's financial results or experience, which can be influenced by mortality rates, expenses, and investment earnings.

"Permanent insurance" is really a catchall phrase for a wide variety of life insurance products that contain the cash-value feature. Within this class of life insurance, there are a multitude of different products. Here we list the most common ones.

Whole Life or Ordinary Life

If you're the kind of person who likes predictability over time, Whole Life insurance might be right for you. It provides you with the certainty of a guaranteed amount of death benefit and a guaranteed rate of return on your cash values. And you'll have a level premium that is guaranteed to never increase for life.

Another valuable benefit of a participating Whole Life policy is the opportunity to earn dividends. While your policy's guarantees provide you with a minimum death benefit and cash value, dividends give you the opportunity to receive an enhanced death benefit and cash value growth. Dividends are a way for the company to share part of its favorable results with policyholders. When you purchase a participating policy, it is expected that you will receive dividends after the second policy year - but they are not guaranteed. Dividends, if left in the policy, can provide an offset (and more) to the eroding effects of inflation on your coverage amount.

Universal Life

Unlike Whole Life and Variable Life where you pay fixed premiums, Universal Life offers adjustable premiums that give you the option to make higher premium payments when you have extra cash on hand or lower ones when money is tight.

Universal Life allows you, after your initial payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. You also can reduce or increase the death benefit more easily than under a traditional Whole Life policy.

Most Universal Life policies will also provide a guaranteed rate of return on your cash values, with one important exception. It is possible that you will not accumulate any cash value if any, or all, of the following circumstances occur: administrative expenses increase, mortality assumptions are changed, the insurance company's investment portfolio underperforms, premium payments are insufficient.

In recent years, there’s been considerable interest in what’s commonly referred to as Universal Life with Secondary Guarantees (also known as a “No-Lapse Guarantee”). With an ordinary Universal Life product, the policy could lapse under certain circumstances (e.g., interest rates fall below projections, insurance costs or administrative expenses rise, etc). When you buy a policy with a “secondary guarantee,” you’re guaranteed that the policy won’t lapse even if the above factors come to pass.

One of the most attractive things about Universal Life policies with Secondary Guarantees is that they provide lifelong coverage at rates that can be considerably lower than other forms of permanent insurance. That’s one of the main reasons why these policies have become so popular for estate planning purposes. If you have a federal estate tax liability (in 2008, estates valued at over $2 million are taxed), your main concern is liquidity at death. When you die, you don’t want your heirs to have to hastily sell off assets in order to pay estate taxes. With a Universal Life policy with Secondary Guarantees, the death benefit is guaranteed for life and you have the flexibility of adjusting your premiums, a valuable feature since estate tax rates and exclusion amounts keep changing from year to year.

Indexed Universal Life

Currently, the most popular type of permanent life insurance is Indexed Universal Life (IUL), which offers all the benefits of universal life, with accumulation values tied to a stock market index. With the uncertainty of the markets and with net worth’s declining, safety of principal has become extremely important. IUL offers a solution, with upside potential, without the downside risk.

An IUL policy has a fixed interest rate component as well as an indexed account option. Whereas traditional UL may credit 4 percent to 6 percent, IUL has the ability to receive index-linked gains as high as 18 percent or more. In years in which the index does well, interest-crediting rates will rise, and in years in which the index performs poorly, interest crediting will fall. The policy owner can reap the rewards of stock market-type gains and be protected with minimum-guaranteed interest rates in case of stock-market losses. IUL otherwise has all of the typical features of traditional UL and operates under the same policy mechanics. The Major difference with IUL is the option to participate indirectly in the upward movement of a stock index without accepting the normal risk associated with investing in the stock market. The actual interest credited to a policy’s cash value is determined by the changes of an equities index. Most insurance companies use the S&P 500 Index as the underlying index for their IUL product. This combination of the potential to realize higher upside returns without the downside risk makes the IUL policy a unique and attractive cash-accumulation vehicle, especially in these turbulent economic times.

IUL has seen increased sales and an increased number of companies offering it. While many variable universal life policies recorded big losses in the stock-market drop in 2000 and after, IUL owners recorded no losses or even small gains. In addition, while the low interest-rate environment hurt returns on fixed UL policies, IUL policies were crediting higher returns due to their links to stock-market indexes. And there’s never been a better time to look into IUL. Because of the poor economy, insurance sales are down, which has caused insurance carriers to fine tune their products and make them more attractive than ever.

Variable Life

Variable Life insurance is offered via a prospectus and provides death benefits and cash values that vary with the performance of a portfolio of underlying investment options. You can allocate your premiums among a variety of investment options offering different degrees of risk and reward: stocks, bonds, combinations of both, or a fixed account that guarantees interest and principal. This type of insurance is for people who are willing to assume investment risk to try to achieve greater returns. With Variable Life you're shifting much of the investment risk from the insurance company to yourself. Good investment performance would provide the potential for higher cash values and ultimate death benefits. If the specified investments perform poorly, cash values and death benefits would drop accordingly.

Variable Universal Life

Variable Universal Life insurance is a flexible premium, permanent life insurance policy that allows you to have premium dollars allocated to a variety of investment options, offering varying degrees of risk and reward. These policies are a good choice for people seeking maximum flexibility. Should your insurance needs change over time, Variable Universal Life usually provides the flexibility to increase or decrease your amount of coverage. You can also make a lump-sum payment to increase the policy's cash value. (The maximum lump-sum payment is subject to IRS limitations.) And, should an emergency arise and you are short on cash, you may be able to skip a scheduled payment and let the accumulated cash value cover the policy's expenses. Keep in mind that the cost of insurance and administrative expenses are still incurred. As your insurance needs change, it is quite probable so will your long-term investment goals and risk-tolerance levels. With Variable Universal Life, you have flexibility to transfer funds between the investment divisions, tax free. So, you have the freedom to make decisions based on your needs and not on the tax ramifications.