Fundamentals: Permanent Life Insurance
- Oct 31, 2016
There are two basic types of life insurance policies: term and permanent. Both provide funds to named beneficiary or beneficiaries in the event of accidental or wrongful death. The primary distinction is duration of payments. Term life insurance policies are popular because they last for a fixed period with the option for renewal, whereas permanent life insurance is a lifelong commitment with no time restrictions. The latter also has the added benefits of cash value, which means that the longer the payment period, the greater the policy’s cash value. If financial troubles were to arise in the future, the insured person would have the option of cashing out the policy.
As with any insurance policy, there are disclaimers and restrictions. Life insurance will only provide beneficiaries with compensation in the case death is due to natural causes. Most illnesses are covered, but consult with your insurance agent about exclusions. Although policies can be tailored to a client’s specific needs, general exclusions that apply to both term and permanent policies are suicide, death due to reckless behaviour, disability and critical illness.
If choosing a term life insurance policy, options include a level term or a decreasing term. Level term means that benefits do not change during the period the policy is active. Decreasing term, on the other hand, implies a drop in benefits over time. Normally, this drop is administered in one-year increments.
Four main types of permanent life insurance:
- Traditional whole life: traditional whole life is the standard, most common type of permanent insurance policy. It offers beneficiaries death benefits, alongside a cash value account. The funds in this account would grow based on dividends the insurance company pays to the insured person.
In the 1970s and 1980s, two variations on the standard policy, universal life insurance and variable-universal life, were introduced. They differentiate from the traditional policy chiefly with respect to the cash value account.
- Universal life: A flexible version, which allows insured persons to increase death benefits if they pass a medical exam. The insured person can also alter their premium payments once adequate funds have accumulated in their cash value account.
- Variable: Invest cash value account in stocks, bonds and money market mutual funds, which can allow for faster growth of funds. The savings associated with the universal plan, on the other hand, earns a money market rate of interest, and accumulates funds more slowly. There are, however, risks associated with investments. Death benefit and cash value may decrease with poor investments, although some companies have set a minimum level below which benefits will not fall, even if investments are not doing well.
- Variable-universal life: Combining aspects of universal life and variable life is the variable-universal life. Here insured persons can dabble in investments while also having the option of adjusting premiums and death benefits.