Permanent Life Insurance

Life insurance is something that many people need and purchase throughout their lives depending on their individual circumstances. If you are single or retired with little or no debt, then you may not even need a life insurance policy in the first place. But if you are married with dependents that rely on you or fear you may become un-insurable for medical reasons, then life insurance is something you will most likely want to look at. There are basically two major types of policies that are available to people, term and permanent policies. The term is exactly what it sounds like; you buy a policy for a set death benefit with set premiums for a certain period or term. Then there are permanent policies which come in many varieties, but two that are similar and often confused are universal and whole life. Let us look at those two types a little more.

First, both types of these two policies are considered permanent as they are guaranteed for the length of your life provided you pay the premiums promptly. That compares to a term which is good for a set period of time, say 30 years for example. Both pay a death benefit but are they the exact same in the manner in which they do so? Both accumulate cash value but is it at the same rate? Both require premiums to be paid on a regular basis but are they the same as well? We will look at these three questions and see what the answers are.

We will look at the death benefit and what it can and cannot do within the policy you buy. In a whole life policy, the death benefit is set when the policy is purchased, and it does not change during the life of the policy. Then with a universal policy, you have the option to increase or decrease your death benefit as your situation changes throughout your life. That is a major difference in these two permanent life insurance policies.

Saving component tax and universal policy

So, what about cash value? Yes, they both accumulate a cash value that is a saving component of these policies. And both allow you to take out a tax-free loan against the cash value that has accumulated in the policy. And both allow the cash value to grow tax-deferred within the policy itself. But in a whole life policy, the cash value is fairly easy to predict as the interest rate in which it pays is generally set or will be set on an annual basis. This means that the cash value is stable and will have reliable returns. But in a universal policy, the interest rate is generally variable and can change as frequently as monthly. This means when interest rates rise a universal policy will gain more in its cash value than a whole life and vis verse when rates are dropping. As for the loans that can be taken against either policy they must be repaid with interest, or they could decrease your death benefit if they are outstanding. For those details and others concerning cash value and loans check your policy carefully.

And finally a difference that is as big as the first difference we look at, and that is the payment of premiums. With a whole life policy, the premiums are set at a certain price to you on a set schedule and will stay that way for the life of the policy. Compare that to a universal policy which the owner can change the policy’s premium as they change the death benefit. They can also pay the premiums out of the cash value, something most permanent policies allow in fact.

So what is whole life?

So what is whole life? It is a policy that has level premiums, a cash value that can be utilized while you are alive and protection with a death benefit that cannot be outlived provided you pay your premiums. What is universal life? It is a policy that has the flexibility to adjust the premiums and death benefits, a cash value you can use while you are alive with a guaranteed death benefit provided you pay your premiums promptly.

So the fact is they are extremely similar with the differences being the interest rate that is paid on the cash value and the level of premiums and death benefits being adjustable with the universal life policy. So which is better for you? That will depend on the situation you are in, but I advocate for the use of one or more term policies that if used correctly can ensure you against most major life events. But if you need a permanent policy, please consider these factors and others when making a decision. Always seek the advice of a financial advisor or a trusted life insurance agent.

If you have any questions, please feel free to contact me directly or leave a message here.