Permanent Insurance
Permanent insurance provides lifelong protection and is known by a variety of names. These policies are designed and priced for you to keep over a long period of time. If you don't intend to keep the policy for the long term, it could be the wrong type of insurance for you.
Most permanent policies, including whole, ordinary, universal, adjustable and variable life, have a feature known as "cash value" or "cash surrender value." This feature, which is not found in most term insurance policies, provides you with some options:
- You can cancel or "surrender" the policy -- in total or in part -- and receive the cash surrender value in a lump sum. However, if you surrender your policy in the early years, there may be little or no cash surrender value.
- If you need to stop paying premiums, you can often use the cash surrender value to continue your current insurance protection for a specific period of time or to provide a lesser amount of protection to cover you for as long as you live if there is sufficient cash value.
- Usually, you may borrow from the policy, using the cash value in your life insurance as collateral. 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 the beneficiaries will receive a reduced benefit at the death of the insured.
- Cash values of many life insurance policies may be affected by your carrier's future experience, including mortality rates, expenses and investment earnings.
- Keep in mind that with all types of permanent policies, the cash value of a policy is different from the policy face amount. Cash surrender value is the amount of available cash when you surrender a policy before its maturity or your death. The face amount is the money that will be paid at death or at policy maturity.
Note: Any reference to the word guarantee is based on the ability of the underlying insurance company to honor that guarantee.
What are the Types of Permanent Insurance?
There are many different types of permanent insurance. The major ones are described below:
Whole Life or Ordinary Life
- This use to be the most common type of permanent insurance. It is life insurance that is kept in force for a person's whole life as long as the fixed, scheduled premiums are maintained. All Whole Life policies build up cash values. Most Whole Life policies are guaranteed as long as the scheduled premiums are maintained. The variable in some whole life policies is the annual dividend which could vary depending on the investment performance and other business criteria of the insurance company. If the company is doing well and the policies are not experiencing a higher mortality than projected, values are paid back to the policyholder in the form of dividends.
Universal Life or Adjustable Life
- This type of permanent insurance allows you to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums set by the insurance company and by the IRS. You also can reduce or increase the amount of the death benefit as your needs change. (To increase the death benefit, you usually will be required to furnish satisfactory evidence of good health.)
- While this arrangement may sound very arbitrary, in practice the premium can be selected based on your needs and desires. For example, the premium can be calculated based on the current interest rates and expenses of the insurance company that will yield enough money at some point in time (such as retirement) for some specific purpose (for example to keep the policy in force without any more premiums being paid).
- The interest earnings credited to the cash value account will vary with the investment performance of the insurance company and will usually will not fall below the company’s published minimum.
Variable Life
- This type of permanent policy provides death benefits and cash values that vary with the performance of an underlying portfolio of investments held in a separate account. You can choose to allocate your premiums among a variety of investments allowed in the policy which offer varying degrees of risk. You will receive a prospectus in conjunction with the sale of a variable product.
- The cash value of a variable life policy is not guaranteed, but will rise and fall with the value of the underlying investments.
