Permanent life insurance is a contract between the policy owner and the insurer where the insurer agrees to pay a lump sum of money at the time of the insured`s death. In return, the policy owner agrees to pay a stipulated amount called a premium at regular intervals or in lump sums. In other words, with most insurance policies, life insurance is a contract where a benefit is paid to the designated beneficiary if an insured event occurs which is covered by the policy.
The value of permanent life insurance is the ‘peace of mind’ experience created for the policyholder by reducing the financial consequences caused by the death of the life insured.
A proper life insurance policy can mean the difference between leaving your loved ones protected financially and leaving them to cope with debts and an insufficient income.
Life insurance can help create financial security for you and your family. If you should die prematurely, it can be used to:
- Pay final expenses and any debts;
- Provide an income for your family;
- Ensure your family has the resources to maintain a comfortable standard of living;
- Leave a legacy to your favorite charity;
In addition, while you are still living, some life insurance policies can:
- Build tax-advantaged savings you can draw upon as needed for personal or business opportunities;
- Supplement your retirement income or provide for long-term care or home care for yourself or a family member.
Key Characteristics of Permanent Insurance
A key characteristic of permanent insurance is known as cash value or cash-surrender value. In fact, permanent insurance is often referred to as cash-value insurance because these types of policies can build cash value over time, as well as provide a death benefit to your beneficiaries.
Cash values, which accumulate on a tax-deferred basis, can be used in the future for any purpose similar to assets in most retirement and tuition savings plans. In some permanent life insurance policies, you can borrow cash value for a down payment on a home, to help pay for your children’s education or to provide income for your retirement. You may also choose to leave it in the policy and allow accumulative growth. When you borrow money from a permanent insurance policy, you are using the policy’s cash value as collateral and the borrowing rates tend to be relatively low. Unlike loans from most financial institutions, a permanent insurance loan is not dependent on credit checks or other restrictions. However, the insured must repay any loan with interest or his/her beneficiaries will receive a reduced death benefit and cash-surrender value.
If you stop paying the premiums, some policies will allow for you to use the accumulated cash value to continue your current insurance protection for a specific time or to provide a lessened amount of death benefit protection. If you decide to stop paying premiums and surrender your policy, the guaranteed policy values will be yours.
Cash value is accumulated over the time, thus if you surrender your policy early, there may be little or no cash value.
Whole Life Permanent Insurance
A whole life policy can earn dividends that can fluctuate from year to year. Dividends are determined by the company each year and are not guaranteed. When a dividend is payable, you may choose to take it in cash and use it to purchase more insurance or to pay/reduce your premiums.
In most policies, when the life insured dies, the insurer will pay the beneficiary the death benefit consisting of the face amount of the policy plus any accumulated dividend.
Limited pay permanent life insurance
An additional form of permanent life insurance is limited pay life insurance where all the premiums are paid over a set period after which no additional premiums are required to keep the policy in force. Common limited pay periods include 10-year, 20-year, and paid-up to age 65.
Some insurers offer a guaranteed cash value at specific ages.