Permanently Understood

Last week we talked about what term insurance is and how it works. As promised, this week is all about the second type of insurance, permanent insurance!

Permanent insurance is exactly what it sounds like, it’s forever insurance. It covers you for life, it doesn’t matter when something happens, you have guaranteed protection for life, unlike term insurance where it has an expiry date.

There are major differences between term insurance and permanent insurance and you’ll see this reflected in the premiums, as permanent insurance is more expensive than term in the short term. In the long run though, there will be a point that permanent insurance is less expensive, this is because once you lock in your cost of insurance (and the earlier you lock it in, the less expensive it is), your premiums never change with permanent insurance. You can also choose a cost of insurance type that allows you to pay off your policy in a specified number of years, 10, 15, or 20 for example. After you’ve paid off your policy, you don’t have to make any more payments but you have the coverage for the rest of your life.

Another unique feature of permanent insurance is that there is an investment portion to your policy. There are two types of permanent insurance, Universal Life and Whole Life, the difference between the two comes down to the investment component of the policy. Participating Whole Life can provide policyholder with dividends, there are a few different options on how to use/receive these dividends, but the most common one is that they are used to purchase paid up additional insurance coverage. Universal Life offers policyholders a tax advantaged savings tool within their policy, you have the flexibility to invest above your minimum cost of insurance (up to the maximums) and the growth within the policy is tax deferred. This investment component of permanent insurance can provide a cash surrender value and could also increase the insurance protection over time.

Permanent insurance is an essential tool for a sound financial plan, it provides a guaranteed, tax free benefit to your beneficiaries. It is an extremely useful for a number of planning purposes, not limited to, paying for final expenses, including capital gains taxes, leaving a legacy, a charitable donation, and many more.

Which do you think is the better insurance type? Come back next week to find out.