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What is permanent life insurance?

Permanent life insurance represents a category of several types of life insurance without a pre-set expiration date, including whole life insurance and universal life insurance. Permanent, as the name implies, is designed to last for your entire life. In other words, when you buy it, you are permanently covered, regardless of how long you live and the coverage does not expire as long as premiums are paid.

Why are permanent life insurance rates higher than term life insurance policies?

With permanent life insurance, your premiums never change. The rate you pay in the beginning is what you’ll pay every month for life. When you buy permanent life, the insurance company sets a premium based on your age (and other factors) at the time you purchase your policy, but it also takes into consideration that the older you are, the greater the risk that you will pass away. The higher starting premium helps the insurance company mitigate that risk.

It’s one of the reasons that permanent life insurance is about 10 times more expensive than term life insurance.

Here’s What You Need To Know About Permanent Life Insurance

Key Advantages of Permanent Life Insurance

Lasts a Lifetime: One policy lasts your entire life. No worries about having to convert to another policy when a term runs out.

No Cost Surprises: The premium set at purchase stays the same for the rest of your life.

Cash Resource: Accrues a cash value that grows at a specified rate each time you pay a premium. You may be able to borrow against that cash value tax-free (or cancel it for part or all of the cash value) once it reaches a certain amount (with interest).

Pre-planned Inheritance: Pays a death benefit to one or more beneficiaries that you choose. (Family, friends, business partners, charities – it’s up to you). The benefit paid to all beneficiaries is tax-free.

Good for Estate and Retirement Planning: Because you can’t outlive a permanent policy, permanent life insurance is more suitable than term life insurance for this purpose. Additionally, the cash value grows tax-deferred like retirement account gains.

Things to Consider About Permanent Life Insurance

Higher Premiums: Because permanent policies provide a lifetime of coverage and generate cash value, the premiums are much higher than they would be for term life insurance—typically 10 times the cost of a term life policy. The high cost might cause you to buy less life insurance than you need.

Complexity: There’s a complex relationship between how premiums are set and cash values are determined, among other things that dictate the design of a permanent life insurance policy. Purchasing such a policy generally requires more research, planning and professional help to avoid surprises later on.

Risk to Value Ratio: Economic conditions can adversely impact the value of a permanent life insurance policy. Your cash value could be reduced over time or you may need to reduce the death benefit at some point.

Loan Default Penalty: If you borrow against your policy but pass away before the loan is paid back, that amount will be deducted from the benefit paid to your beneficiaries.

Permanent Life Insurance Could Be A Good Choice For You If:

  • Your family health history indicates that you might develop a medical condition in the future. (e.g., cancer or heart disease) that could make becoming insured challenging.
  • You want to maximize your pension.
  • You want to replace deferred annuities designated for heirs.
  • You want to equalize inheritances for your heirs.
  • You want to ensure that contractual obligations are met.
  • You want to provide for a new or disabled family member or partner.

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