What You Should Know About Buying Permanent Life Insurance
By M. Kotch
Many of us have received life insurance pamphlets in the mail. You know the type charting your age, gender and monthly premium each month to gain coverage that’s typically many hundreds of thousands of dollars. But look closely and you’ll notice that what most of us receive outlines term life insurance, i.e., temporary coverage. Insurance companies are not in the habit of sending out permanent life insurance brochures and they’ll tell you it’s because it “depends on so many factors.”
Yes, permanent life insurance (which includes whole, universal, variable universal and many other types of plans) is far more expensive and complicated than term life—because insurance companies need more detailed information to create an individual coverage plan for you, depending on your current age and health, expected earnings, retirement age and amount of coverage you’re looking for.
Permanent Life Insurance
The subject of permanent life insurance is vast and can be overwhelming; here are some important tips to keep in mind before buying permanent life insurance:
• Permanent life insurance is a life-long commitment. Past a grace period (typically no more than 30 days), missing a payment means losing your coverage and all the money you’ve paid toward your policy.
• Permanent life insurance is recommended for those who wish to leave behind an inheritance for a spouse, children, grandchildren or a charity. But don’t expect as large a payout as you would get with term coverage; temporary insurance is designed to cover you during the volatile years that include mortgages, college tuitions and other large expenditures.
• Unlike term life insurance, most insurance companies will not let you choose a permanent policy amount, but will determine what you’re eligible for depending on your age, health and expected earnings.
• Permanent life insurance premiums are expensive. Let’s use this example: a healthy 30-year old woman, with a salary of $50,000 a year, who expects to retire at the age of 65 can purchase a permanent life insurance policy of $500,000 by paying roughly $3200 a year—for the rest of her life— in premiums. If the same woman chose a 30-year term life insurance policy she’d only have to pay $220 a year, for 30 years. But if she lives past the age of 60, she will have lost all the money she put toward the term insurance plan.
• If you decide on a permanent policy, be prepared to deal with insurance companies that will try—and try again—to steer you toward buying a term policy, or both term and permanent. Why? Because that’s how they make their money. The truth is, the majority of term insurance policyholders live past their coverage, and the insurance companies never need to pay out those policies. Yes, permanent life insurance is very expensive when compared to term, but that’s because insurance companies know that if you never miss a payment, someday they will have to cash your policy.
• Permanent life insurance makes sense for those with large assets, those secure in their careers and who are sure they will be able to meet their premiums year after year.
• Many policies include a “cash value” option. What does that mean to you, the policyholder? The cash value of an insurance policy starts accumulating from the moment you begin your policy; you can access it after a certain number of years, depending on the specific company (typically 2-4 years). The longer you’ve been paying your premiums, the larger the amount of cash value you accumulate on your policy.
• The cash value is mainly utilized in two ways:
1. You can collect your cash value at anytime by borrowing it against your policy. Think of it as an equity line that you can access through your policy. Be aware that if you do not repay the cash value before your death, it will be deducted from the overall amount that’s paid out. For example, let’s say you’re covered for $500,000, have accumulated $115,000 in cash value (after decades of paying your premiums), and now wish to use that money for your dream trip around the world. If you pass away before paying that money back, your beneficiaries will only collect $375,000 because the cash value you borrowed has now been paid back from your own policy.
2. The cash value of your policy can be used toward a “paid up” policy; a paid-up policy means that you do not have to pay any more premiums toward your policy, but that you will be locked into whatever amount of coverage you’ve accumulated up to that point. This paid-up policy can be activated after a few years of paying your premiums, but makes most sense after you’ve accumulated a large cash value. This can be better explained with another example: Our same policyholder from the examples above has accumulated $115,000 in cash value after decades of paying her premium. She has now also accumulated (or paid toward) $400,000 of her policy coverage (though she originally took out a $500,000 coverage plan). She has the option of giving the insurance company her cash value in exchange for not having to pay any more premiums for the rest of her life. The insurance company will collect the cash value in exchange for a locked-in amount of $400,000 that will be paid out to her beneficiaries upon her death.
The best way to approach permanent life insurance is by speaking to more than one insurance company, comparing prices and premiums, and by consulting your family, accountant (if you have one) and asking yourself hard questions about your ability to fulfill a lifetime of premiums toward your policy. Remember that many financial experts advise taking the same amount you would put toward a policy and saving or investing it.
Note: This article is for general information purposes only. Be sure to consult with a financial expert before making the insurance decision that’s right for you.
