elderly couple on the beach life insurance

Permanent Life Insurance: About Whole and Universal Life Coverage

Life insurance is one of the most popular types of coverage in the United States – with a rich history (the earliest known insurance policy dates back to the 16th century) and a variety of formats, a life policy represents a great way to protect your loved ones against the unexpected. While term life insurance has become increasingly sought after in recent years, there is still something to be said about permanent insurance and the lifelong protection it ensures.

Life Insurance Cash Value

The main features of a permanent life insurance policy are its long-lasting coverage and savings component. Such contracts can serve as an investment vehicle through the cash value they accumulate over time, with the main difference between types of permanent coverage being how cash value, premiums, and benefits can change throughout a policy’s lifespan.

Your life insurance policy can be used as an investment since it accumulates interest. While most financial advisors consider conventional investment strategies to be more advantageous than two-in-one hybrids like permanent insurance, there are benefits to going down this route.

The cash – or surrender – value of a policy represents the money you’d be entitled to receive if you cancel your insurance. Each month, a part of your premium will go toward financing the cash value. However, it may take several years for you to be able to take advantage of this feature. Once there are sufficient funds in your “savings account”, you can withdraw money from it and use it to pay your premiums or as collateral for a loan.

Policy Loans

Policy loans are a popular – albeit increasingly expensive – financing solution that can give you fast access to cash. With policy loans, your insurance company can issue a loan using your policy’s cash value as collateral. What makes this solution attractive is the fast underwriting process – you can forego the lengthy verifications that come with traditional lending. However, the interest rate can be pretty high (up to 8%), and if you’re not careful with your payments, it can cut into your policy’s death benefit or make it lapse altogether.

Types of Permanent Life Insurance

There are two main types of permanent life insurance: whole and universal. Whole life insurance is by far the most well-known form of permanent protection, with universal insurance coming in as a more flexible option for those who want to take advantage of their policy’s investment component. In addition to the two, I’ll also go over a few honorable mentions in order to paint a full picture of your options.

Whole Life Insurance

The best word to use for describing a whole life policy is “predictable”. With this type of coverage, your savings will grow at a guaranteed rate, and your premiums and death benefit will stay the same throughout the years.

Universal Life Insurance

savings jar universal life insurance

Unlike whole life insurance, with universal life, your premiums and payout can vary, without ever dropping underneath a predetermined threshold. This allows you to take advantage of market changes and potentially maximize your insurance investment. A minimum monthly premium will be required to keep the policy afloat, but other than that, the sky’s the limit as you’ll be able to make bigger payments and use them to grow your cash value and death benefit over time. You’ll also have the option to lower your premiums and supplement the payments with money from the policy’s cash value. Note that with universal insurance interest rates, however, can fluctuate based on market conditions and may, in turn, negatively impact your premiums.

Universal life insurance can be variable or indexed. The major difference between the two is what affects their volatility: indexed universal life insurance earns interest based on changes to a stock market index, while variable coverage depends on the performance of the policy’s underlying securities, commonly invested by your carrier in mutual funds. Both are solid options that can guarantee returns well into your retirement years, but you need to have the stomach for the associated risks.

Other Permanent Life Insurance Options

In addition to whole and universal life, there are a few other insurance options that may be a good option, depending on where you find yourself in life.

  • Endowment policies. An endowment policy is a hybrid between term and permanent life insurance: it offers fixed coverage for a certain number of years (can be 10, 15, 20 years) but also guarantees a payout in case you outlive your policy. In the US, it’s primarily used as a savings tool for college tuition.
  • AD&D insurance. Accidental death and dismemberment (AD&D) insurance is a permanent insurance policy that covers deaths, dismemberments, and loss of bodily functions resulting from accidents. Terms can vary, but most policies don’t cover potentially dangerous activities and professions (such as professional race car driving or military service).
  • Final expense insurance. Final expense insurance is a form of whole life coverage marketed toward older individuals. Traditionally, the best moment to get whole life insurance is when you’re young and healthy, but you have strong insurance options even as a senior. Final expense insurance coverage goes as high as $40k and is much easier to qualify for as, unlike traditional whole life insurance, it doesn’t require a medical exam.
  • Survivorship insurance. Survivorship insurance is a form of permanent protection that covers two individuals and pays the death benefit only after both of them have passed away. It’s primarily used as a tool to maximize childrens’ inheritance benefits.

Turning Term Life into a Permanent Life Insurance

Seeing how permanent life insurance is significantly pricier than term insurance, most people tend to opt for the former. However, if you at some point decide that you need permanent coverage, rest assured – you can usually adjust your policy.

Many term life insurance policies offer the option of converting your policy to permanent coverage. This is particularly useful as older individuals (as you may be once your term policy expires) have much higher insurance premiums and may find it more difficult to qualify for permanent coverage.

To check if you can convert your term insurance to permanent life coverage, get in touch with your insurance agent.

The Bottom Line

Permanent life insurance comes in a variety of shapes and sizes and the best way to figure out which one works best for you is to get in touch with an independent insurance agent whom you trust and discuss available options. If you live in Franklin, TN, by all means – drop us a line or pay us a visit. We’d love to help you get the best coverage money can buy.