Permanent Life Insurance Explained

 

What is Permanent Insurance?

Permanent insurance is essentially a life insurance policy, but there are different types of life insurance policies. It is called Permanent Life Insurance to differentiate it from Term Life insurance which only covers a person up to the age of 80 years old and not beyond. Most people who choose term insurance do so to cover a temporary financial need.

However, if you require that you provide financial support after you die, then a Permanent life insurance policy is what you need to secure your family’s needs.

There are 3 types of permanent life insurance policies you can consider.

1. Whole Life Insurance

A whole life insurance policy premium is used to cover 3 different aspects of the policy. Part of the premium is used to cover the administration expenses of the insurance carrier. Another portion goes to cover the cost of the death of the policy holder. The last bit goes to cover the investment portion of the policy.

One of the neat features of a whole life policy is that the investment feature accumulates over the life of the policy. For every premium dollar you spend for the mortality portion, you can accumulate 3-4 dollars within the Maximum Tax Actuarial Reserve (MTRA). This means there is a limit to how much you make, or the investment can accumulate over the life of the policy. Nonetheless, the amount of the return on your investment is relatively generous.

The best part of all is that the investment is a tax sheltered plan which means that the recipient who receives the lump sum investment portion does not pay taxes!

You also have choices in how you pay your premium. You can choose a fixed premium for the life of the policy. You can pay the premiums for limited periods for a set term such as 5 or 10 years, and no more after. Finally, you can also buy a ‘participating’ whole life policy which allows you to receive dividends from the insurance company.

2. Universal Life Insurance

A Universal life insurance policy is very similar to a whole life policy but it has one major difference. When you pay your premium for the whole life policy, the money was apportioned to the 3 areas described above as 1) administrative 2) investment and 3) mortality cost. You have no say in how the premium is apportioned with a whole life policy.

The difference with a Universal policy is that you do have a say. You can specifically choose the investment product(s) where you want to invest that portion of your premium. The advantage is that it gives you greater control in where your money is invested.

The other advantage of a Universal policy is that it allows you to periodically change your premium payments.

For both Whole and Universal Life policies, you also get a cash value returned to you for the investment portion of the policy if you cancel prematurely.

3. Term-to-100 Policy

This is the cheapest and most basic form or Permanent Insurance policy you can buy and it’s quite simple. Premiums stay the same for the life of the policy which you pay, and for a specified death benefit. There is no investment aspect. There is no cash surrender value if you cancel the policy before its expiry. This is the better policy for people over 55 years of age.