Have you ever attempted a conversation with someone who loves what they do so much, they just have to share all of the technical details with you? Even though that conversation may last for quite some time, you checked out about five seconds in. When you start digging into life insurance products, it can feel like that. Your eyes begin to glaze over, and before you know it, household chores seem very inviting.
This article briefly discusses some of the more popular forms of Permanent Life Insurance in simple terms. Sometimes, by keeping it simple, questions can go unanswered. If you are considering the purchase of a Permanent Life Insurance policy, and you have additional questions, a Simplis professional will be happy to speak with you by phone or online chat. You may also email us.
Technical Marketing Speak
Permanent Life Insurance is the terminology used for what is correctly known as Cash Value Life Insurance. The term “Permanent” is used for marketing purposes, and popularized by life insurance professionals. That doesn’t make it a bad thing, or something to shun. It just makes the general concept of Cash Value Life Insurance easier to talk about when a less technical term, like “Permanent”, is used in conversation. Just keep in mind that “Permanent” doesn’t necessarily mean, permanent.
Important note: Permanent Life Insurance policies are always presented as a way to provide life insurance protection for your entire life. However, only those policies with certain guarantees are actually designed to provide this benefit. If lifelong protection is your primary goal, you will need to verify that the policy guarantees coverage for your entire life, as long as you fulfill your financial obligation to the life insurance company.
Meet The Family
Let’s take a peek at the three categories of Permanent Life Insurance: Whole Life, Universal Life and Variable Life.
Whole Life (Simple, Low Maintenance) – This is the most expensive type of life insurance. Life insurance companies set the price for a Whole Life Insurance policy based upon the assumption that a claim will pay out. In other words, it’s not if, but when the company will pay a claim. Whole Life Insurance is designed to last your whole life; it never expires, terminates or lapses, as long as you pay the premium. It offers a guaranteed interest crediting rate, and many companies also pay a policy dividend based upon the company’s profitability. If you own a dividend paying Whole Life Insurance policy, you will share in the profits of the life insurance company, however, you will not share in any losses.
Universal Life (Some Moving Parts, Some Maintenance Required) – This is the most flexible type of life insurance. Universal Life Insurance allows you to make flexible premium payments. Unlike other forms of life insurance, Universal Life does not have a rigid premium payment schedule. A recommended premium payment schedule is always presented so you will understand the level of financial commitment to the policy. Some people use the flexible premium payment feature as a way to save more money within the tax friendly environment of a life insurance policy.*
Universal Life Insurance does not offer the guarantees provided in a Whole Life Insurance policy. The interest crediting rate to the policy varies and is controlled by the Board of Directors of the life insurance company. However, every Universal Life Insurance policy offers a guaranteed minimum interest crediting rate (often 3%). The risk of lapse increases as credited interest rates decline and you don’t increase your premium payment accordingly. The opposite is also true. When interest crediting rates increase, and you continue to pay the same amount of premium, the cash value within the policy will grow faster.
Variable Life (Complex, High Maintenance) – This is considered an investment grade life insurance policy, and as such, all of the risk associated with the performance of the accumulated value rests with you. Like any other life insurance policy, as you age the life insurance company charges more for your insurance. If at the same time the underlying investments within your Variable Life Insurance policy underperform, the life insurance company will demand a higher premium payment from you to keep your policy in-force. The risk of lapse with Variable Life Insurance is higher than any other form of Permanent Life Insurance.
Investment choices for a Variable Life Insurance policy are somewhat similar to a 401(k) plan, wherein you have access to 20 or 30 stock and bond funds. This policy can be set up to be flexible, like a Universal Life Insurance policy, or rigid like a Whole Life Insurance policy. Finally, Variable Life Insurance has more fees than any other type of life insurance.
Hybrid Life Insurance
Within each of the three categories of Permanent Life Insurance, there are many hybrids. And, in some cases, there is cross-breeding between categories. Here are some of the more popular variations:
Paid Up Whole Life – This type of policy is scheduled to be paid in full at a certain age, or after a certain number of years.
Guaranteed Universal Life (GUL) – This type of policy is guaranteed to remain in-force through a certain age, as long as the premium is paid on time, every time. Some call this a “Permanent Term” policy.
Index Universal Life (IUL) – The crediting rate to the cash value within the policy is tied to a stock index, usually the S&P 500.
Variable Universal Life (VUL) – This type of policy offers the flexibility of a Universal Life insurance policy, together with the investment opportunity and risk of a Variable Life Insurance policy.
Permanent Life Insurance offers attractive living benefits in addition to a death benefit common with all life insurance policies. It is often presented in a way which makes the living benefits seem more compelling than the death benefit. It’s true that the accumulated value within these policies can be used for future needs on a tax friendly basis, while the Insured is still living, if the cash is accessed properly. However, for most consumers it is wise to purchase life insurance for the life insurance, and think of the accumulated cash value of a Permanent Life Insurance policy as a secondary benefit to be used “just in case”.
I hope this brief article has helped you better understand some of the Permanent Life Insurance options available to you. While these policies require more education to understand, they can be a good solution for long term life insurance needs.
*Subject to certain federal regulatory restrictions.