Certain types of permanent life insurance are designed to be flexible to meet your needs as they evolve over time. While its primary purpose is to provide a death benefit, it can be used for many different purposes: tax-advantaged supplemental income through loans and withdrawals; federal income tax-free death benefit; and estate planning. The benefits don’t stop there and vary by the type of policy you have. We’ll focus on benefits associated with term life and universal life insurance.
What is permanent life insurance?
Permanent life insurance policies offer a death benefit and can also offer cash value accumulation. The death benefit is what is paid to your beneficiaries when you pass away. Cash value accumulation is a separate component that allows you to access your policy value while you’re still alive through loans and withdrawals if there are sufficient funds available. Permanent life insurance lasts from the time you purchase the policy to the time you pass away, as long as you pay the required premiums to keep the policy in force. Generally, permanent life insurance is more expensive when compared to term life insurance because of additional features and benefits that these policies have, although a permanent life insurance policy can be less expensive than successive term policies taken until the policy holder is no longer insurable. There are several different types of permanent life insurance, such as whole life, universal life, index universal life, and variable universal life. Because each of these types of permanent life insurance has unique features, it’s vital for you to discuss your life insurance needs with a financial professional to determine what type of permanent life insurance meets your unique needs.
What is term life?
Term life provides coverage for a specific “term” or period of time should you pass away. It’s similar to car insurance in the sense that once the specified period is over or you stop paying premiums, you’re no longer covered. Most policies are purchased for 10-, 20-, or 30-year terms. Some policies allow you to renew after your term runs out, but policies tend to get more expensive because you’re older.
When compared to whole life, term life typically offers larger amounts of coverage for relatively smaller premiums. It provides a cost-effective way of meeting a temporary insurance need, which makes it appealing to families with large expenses such as child care, bills, mortgage, etc. Often, by the time the term expires, the kids will have moved out, the mortgage will be paid off, and their insurance needs may be less.
While term life pays a set death benefit, it does not accumulate any cash value, nor can you borrow against it. If, at the end of the term, you haven’t used it, you get nothing. But, some companies offer “living benefits” on certain types of term life policies. Living benefits or “accelerated death benefits” allow the policyholder to access their death benefit early in the case of a qualified critical, chronic, or terminal illness. This means you don’t have to die to tap into those funds. You can use a portion of your anticipated death benefit to pay for medical bills and replace lost income.
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