The Varieties of Permanent Insurance

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What are the Different Types of Permanent Insurance?

Permanent life insurance is an insurance policy that builds in value over time. Its worth consists of both a cash value portion and a death benefit. Unless the owner fails to pay their premiums, the policy cannot be cancelled for any reason by the insurer with the exception of fraud in the original application. If fraud is discovered, the policy must also be cancelled by the insurer within a legally-specified time frame, which is generally two years. Because of the investment component in a permanent life insurance policy, its premiums are generally considerably higher than term life insurance premiums with a comparable death benefit.

Permanent insurance comes in a variety of different policy types, which include:

Ordinary or Whole Life

This is by far the most commonly-written permanent policy type. A whole life policy typically offers a savings account along with a death benefit. The savings account portion of the policy accrues interest and is paid out to the insured party in dividends. On the plus side you have guaranteed returns on the cash value portion, set death benefit amount and a fixed annual premium price. The disadvantages include inflexible premium structure and usually less of a return than on other savings alternatives. Death benefits can be increased through the accrual of dividends on the policy or through a Rider that will allow you to pay a higher premium in return for a death benefit increase.

Universal Life

Also known as adjustable life insurance, this type of policy differs from whole life in that you can make withdrawals or take out an interest-bearing loan against the cash portion of the policy. Universal life policies also allow you to alter or reduce your premium payments, provided that there is enough money in the account to cover administrative costs. However, because of the risk of interest rates or administrative costs rising, ordinary universal life policies are at risk of lapsing. So, another option to consider is adding a Secondary or No-Lapse Guarantee to a universal life policy.

With this addition, the universal life policy is insured not to lapse if payments are insufficient. Universal life policies with secondary guarantees have become popular recently because they provide lifelong coverage for considerably less cost than other forms of permanent insurance.

Such policies are especially valuable for estate planning purposes since if you think that your estate will have a federal tax liability, a primary concern for you will be having sufficient liquidity at your death to pay estate taxes without your heirs having to conduct a hasty sale of your assets. A universal life policy with a secondary guarantee will protect your death benefit for life, and will provide liquidity for estate taxes while still allowing you to adjust premiums.

Variable Life

Variable life insurance is generally offered through a prospectus and it presents a variety of investment options in addition to the death benefit. As with Universal life, you can also make withdrawals or take out interest-bearing loans against your policy.

In addition, you can have whatever funds you have accumulated in the cash value portion of your account invested in professionally-managed equity, index or mutual funds or stocks and bonds. Be aware that you are exposed to all market movements with this type of investment, and that if your investments don`t perform, then your policy`s cash value and its eventual death benefits will drop accordingly.

Variable Universal Life

Variable universal life insurance policies share features with both variable and universal policies. They feature a variable premium and allow you to allocate your policy`s cash value to investment options of varying risk, as well as allowing you to increase or decrease your coverage.

This policy will also allow you to alter or even eliminate your premium payments as long as there are sufficient assets to cover the change in premium. With this type of account you also have the freedom to transfer funds between different investment options offered on the policy without incurring taxable events. A variable universal life policy is perfect for a person that feels comfortable assuming market risk in order to increase their return.

The optimal choice of permanent life insurance policy for you will depend on your particular situation. Accordingly, it`s a good idea to have a licensed insurance agent help you consider the available options, and then consult with your accountant and estate planning attorney to confirm that your choice of policy type will fit your situation best.

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