What is life insurance? It is an insurance contract that is established between the policyholder and the insurer that will pay a benefit upon death. There are various types of life insurance products on the market today. One type of life insurance is called permanent life insurance. Permanent life insurance pays a death benefit to the named beneficiaries and can be a great investment.
Facts Regarding Life Insurance
According to a study by LIMRA titled “Life Insurance Ownership in Focus” more than 87 million Americans have a life insurance policy. The number of Americans that have life insurance is trending upward; however, the average amount of coverage has decreased. Approximately 70% of U.S. households have life insurance.
The Difference Between Term and Permanent Life Insurance
Term life insurance is much simpler than permanent or whole life insurance policies. The buyer agrees to make premium payments for a specific term or period. These policies are commonly purchased for terms of 10, 20, or 30 years. Term policies are fairly affordable and are most popular among households that have dependent children.
Term policies pay a specified death benefit if the insured party dies during the term of the policy. Buyers often choose a term based on when certain milestones are likely to occur. For example, parents may choose a term policy that extends to the estimated time their children will be graduating from college. A term policy can be very important so that dependent loved ones have financial support if you pass away.
A permanent life insurance policy also pays an amount to the beneficiary when the insured party dies. There is no other defined term or length for a permanent life policy. A whole life policy typically has a fixed premium amount. These types of policies often contain clauses preventing an insurer from revoking or otherwise terminating the policy unless premiums go unpaid.
Permanent life policies also have a savings component that builds cash value that the policyholder may borrow or withdraw from. As funds accumulate, they are invested in a tax-protected account. The investment portion of the policy may be subject to stock market fluctuations and the invested funds may generate dividends. Common types of permanent life policies include variable and universal life insurance.
Why Purchase Permanent Life Insurance?
Each consumer has a unique set of individual circumstances. Life insurance policies are fortunately not a “one size fits all” product. Many lower-income individuals immediately recognize that permanent policy premiums are beyond their financial means. These policies tend to be more expensive than term policies.
It is critical that consumers considering a whole life policy are prepared to maintain it. Those with a need for a life policy that exceeds 30 years often find it difficult to find a term policy. Those with a considerably younger spouse who want to ensure that they will have financial support should seek a permanent life policy. Children with permanent disabilities should also be considered when choosing a life insurance policy.
Variable Life Insurance
Variable life is a type of permanent life policy where the cash value and death benefit fluctuate based on the performance of invested funds. When the investments perform well, the earnings may be used to pay premiums or added to the death benefit amount. Variable policies may or may not have a guaranteed return rate. Keep in mind that the cash value may decline in years where investments perform poorly.
Universal Life Insurance
A universal life policy is a type of permanent policy that invests funds. The key aspect that differentiates universal policies is that they generally have a fixed rate of interest. The policies are quite flexible. The policyholder may choose to skip premium payments as long as the minimum required premium is paid during that year. Policyholder’s may have the option to tailor the amount of premium allocated toward the death benefit or cash value.
Indexed Universal Life Insurance
An indexed universal life policy allows the policyholder to maintain cash value in a “fixed account or equity index account.” The investment component is considered to be less risky than variable universal policies. The policyholder can typically pay a premium between a set minimum and maximum range. The cash value of the policy is usually accessible at any time without penalties.
Tax Benefits of Permanent Life Insurance
- The cash value of a policy will increase tax-deferred as a retirement account would.
- Withdraws from the cash value will usually be tax-free up to the amount you have already paid in premiums.
- Life insurance policy beneficiaries can receive the death benefit without having to pay taxes.
- Life insurance policy premiums are typically paid with “after-tax” dollars.
Medical Examination Requirements
A life insurance company often will have applicants undergo a medical examination performed by a professional. You may be asked to complete a questionnaire. A full medical exam may include taking blood or urine samples and other various tests. This is part of the underwriting process that insurers complete when issuing policies.
There are “guaranteed acceptance” life policies available in the market as well. The premiums tend to be comparatively expensive and the death benefit may be restricted to a low amount. These policies are often viewed as being a poor overall value except for those with serious medical conditions.
Policy Waiting Periods
Some policies may have a waiting period. This is an amount of time that must elapse before the policyholder is eligible for the full benefits of coverage. These are commonly referred to as “elimination periods” or “qualification periods” during which you are paying premiums. For example, consider a policy with a two-year waiting period. If the policyholder dies during that time they may only be able to recover the amount already paid in premiums.
Comparing Life Insurance to Other Types of Investments
A permanent life policy is not the best option to choose exclusively for investment purposes. Although there are clear tax advantages, life insurance does not offer an employer match like a 401(k) or other retirement accounts. Those who qualify for Roth IRA’s may find these to be a superior option for investment purposes. It is recommended that you always consult a financial advisor or other professional.
Advantages to Purchasing Insurance Through an Independent Agency
If you have shopped around for insurance recently you have likely encountered an overwhelming number of options. Trying to compare policy options can be time-consuming. Unlike a captive insurance agent, an independent agent can offer policies from various insurance companies. These professionals are positioned to efficiently evaluate and identify the best options for your unique set of circumstances and goals.
Independent Agency Provides Life Insurance in Casa Grande
The Gebhardt Insurance Group is a well-established provider of insurance solutions and is locally based. We can help you save money on insuring your home, vehicles, business, and much more. Contact our team of professionals today at (520) 836-3244.