There is an old saying:
“The only guarantees in life are death and taxes.”
So, if you could absolutely protect yourself financially against one, wouldn’t it be smart to do so? Permanent life insurance is a life insurance type that literally protects you until the day you die, no matter how old you get. You cannot outlive your policy.
Within the realm of permanent life insurance, there are different kinds, however, with different levels of guarantees. Be mindful about what your situation is, what your needs are, and which one will be the most appropriate and cost effective for you in the long run. The decisions you make with permanent insurance might be ones you’ll need to be confident they remain durable for more than half a century, or longer.
Permanent Life Insurance
The first policies ever sold when life insurance was in its infancy were whole life, or permanent products. Death benefit amounts were just a few thousand because it was nearly 200 years ago, and only very prominent figures and businessmen covered their lives, initially. Obviously, as more awareness grew behind the subject and products evolved to meet many more needs of families and individuals, this changed.
But one thing which never changed was the availability for permanent insurance. It only makes sense that a life insurance product ought to be readily available to cover your entire life, no matter the age or circumstance.
Permanent insurance now embodies the umbrella which has several different types of permanent insurance beneath it, each with its own set of distinct advantages and disadvantages. Here are a few:
- Guaranteed Universal Life (GUL)
- Indexed Universal Life (IUL)
- Variable Universal Life (VUL)
- Survivorship Universal Life (SVUL)
- Whole Life (WL)
- Surivorship Whole Life (SWL)
But before we break down exactly what the differences are among each one, let’s talk about some of the benefits a permanent policy might be able to provide you.
Benefits Of Buying Permanent
Perhaps one of the greatest unspoken benefits of a permanent life insurance policy is the control you have. Although more complex than a term policy, it lends itself to many different ways to utilize the policy both while living and at death.
While living, you can count on level premiums, level (or growing) death benefits, cash growth in a tax advantaged way, access to that cash when needed or intended, additional dividends or even growth through stock markets, and more. There are numerous situations where a universal or whole life policy can perform where a term simply can’t, largely due to the cash value aspects within the policy, as well as its permanent nature.
That being said, you’ll pay a much higher premium per thousand because you must pay for these additional benefits. In the long run, with enough growth within the policy itself, the benefits could outweigh those premiums, but only if used properly. A mismanaged policy or underfunded policy will render itself useless and a waste of premium.
With term, your premiums will rise at some future point in the contract, outlined at the policy’s inception. With permanent insurance, you can expect the same premium, month after month, for as long as you own the policy. In certain circumstances, you may even have enough annual growth within the policy to offset premiums altogether, meaning you can simply stop paying and it will continue to pay itself forever.
You also have flexibility of premiums, if needed. If you have enough cash already within the policy, you can temporarily have the policy make payments for you, for example, if you lose your income or missed a payment. This will incur loan interest, so be careful when using this option.
Level Death Benefits
When you buy a permanent life policy, you want the promise of a payout, and you want guarantees of how much it will be. Fortunately, death benefits never decrease below the stated policy death benefit at issue, and, in fact, it can go up.
There are policies, like the decreasing term product used to protect mortgages, where the payout gets lower along with the remaining principal balance.
However, universal life insurance policies will never go down, and certain whole life policies will actually increase over time due to the amount of cash growth inside the contract. If, however, cash is taken, the death benefit would be lowered by the amount outstanding if one were to pass before paying back the loan.
With term, you’re paying for death benefit, nothing more. With permanent, you have the ability to grow cash inside the life insurance policy itself, and it grows tax free.
A portion of the premiums you pay go towards the cash ‘bucket’ inside, as well as interest and dividends credited by the insurance company. As this cash grows, it is not subject to taxation, and you have the ability to access this cash without taxation if done by loan. You can also access the funds before age 59 1/2, where you would otherwise be penalized if it were coming from a 401(k) or IRA.
The cash growth can also come in the form of mutual funds or index funds through variable and indexed universal policies. The same rules apply to both tax deferment and access to cash before age 59 1/2, all because the premiums paid are after tax dollars. In this way, they can act similar to a Roth IRA with the additional benefits of death benefit leverage.
As mentioned above, you can access the growing cash from within the life police if it’s a permanent one. But it’s not exactly like a basic savings account, and you should have a strict purpose for touching the money inside.
There are different ways to get to the funds, either through loans or surrendering the policy, but bear in mind the consequences of each. With a loan, interest accumulates against the policy and its cash, and it must be repaid or the interest will continue to accrue. With a surrender, you may be subjected to tax because you’re also surrendering the tax shelter the insurance policy provides.
If funded correctly, you can build a policy strictly for the ability to access the cash value in the latter years, and use it as supplemental income. It might also be appropriate to take a loan from your policy if the interest you’ll pay inside is less than you might be able to obtain for private financing from a bank or other lender. Just remember, you’ll want to pay it back quickly to avoid the long term ballooning of interest in the years to come.
Modified Endowment Contracts
With these additional benefits of cash, understand the limitations. If too much cash is injected into the life insurance policy, purposefully or not, in a rolling seven year period, the life insurance contract can become a modified endowment contract (MEC). This changes the taxation on the funds within.
There is only so much cash a policy can hold, so long as there is enough death benefit as well. This helps to prevent someone buying a very small whole life policy and dumping in large sums of money to avoid proper taxation. Once a policy becomes a MEC, it cannot be undone. In this way, any policy which is being over funded or used to grow cash more aggressively needs to be carefully monitored by a specialized agent or registered representative.
There are circumstances where creating a MEC from the beginning is very useful, like in estate planning, but defer to a tax planning professional or estate lawyer before doing so.
Differences In Permanent Life Insurance Policy Types
Hopefully you have a better grasp on the different benefits and limitations permanent policies have in general, so let’s quickly go over each specific type so you can have a deeper understanding of how each type can fit a different need. Obviously there are many ways you could utilize each of these, but assume we’re discussing broad terms and examples.
Guaranteed Universal Life
The most basic of the bunch, a guaranteed universal life policy is one of the cheapest ways to purchase a policy for a guaranteed death benefit.
Cheaper than a whole life, a GUL can provide a death benefit up to age 121 with level premiums and a level death benefit, with guarantees attached to the policy so long as premiums are kept up to date. Access to cash should be limited or not used at all, because the cash growth in the beginning stages of the policy are used to offset the rising costs of the death benefit in the later years.
Best Use: Low cost per thousand for permanent insurance.
Indexed Universal Life
An IUL is a standard universal life insurance policy by means of death benefit, but the growth inside is tied, in part, to different indices of the stock market. The policy is set up to take advantage of the upside potential in the markets, while limiting the downward risks. There are some guarantees attached to the policy, but this is one of the more complex policy types to understand in its entirety.
They have been under fire in recent years because an agent not specifically trained and qualified by FINRA (the legislative body for those selling policies with variable funds) can still sell them.
Best Use: Permanent insurance with potential for cash growth while limiting risk.
Variable Universal Life
Much like the IUL, a variable universal life has a portion of the cash value tied to the markets to attempt to grow money more aggressively while utilizing the tax and death benefits of life insurance. However, a VUL must be sold by a registered representative (one approved by FINRA) because there is unlimited upside as well as unlimited risk with the funds inside. The death benefit of a VUL can also increase in order to allow greater cash growth without the policy becoming a modified endowment contract, so keep this in mind.
Best Use: The highest growth potential, and highest risk, permanent policy.
Survivorship Universal Life
A lesser used permanent type and often reserved for the senior life insurance market, a survivorship universal life policy is one of only two kinds of permanent death benefit that spreads across the lives to two individuals, not one.
This is key because, for estate planning purposes, a death benefit is not needed until both parties have passed. This allows the estate to pay a lower cost per thousand while still maintaining the needed payout for as long as either shall live. This type is very useful for a small amount of persons, and should include a tax professional before applying to make sure it fits your needs in the right way.
Best Use: Estate plans where death benefit will be needed regardless of age.
The founding life insurance policy type, whole life is the original method for consumers and business people alike to buy a death benefit they cannot outlast. With guarantees attached, access to cash if needed, and stable or increasing death benefits, this type is one of the most common for simple, yet permanent needs. Although it’s received competition in many ways, from thought leaders for “Buy Term And Invest The Difference” to those who utilize GULs, it is still a staple product for many insurance carriers, namely the mutual giants.
Best Use: Permanent insurance with the most inherent guarantees.
Survivorship Whole Life
Much like the SVUL, a survivorship whole life is spread across two lives, not one. The use is similar to an SVUL, in that it applies to few situations, estate planning being the most premiere. An SWL has the added benefit of potentially growing the death benefit over a large number of years, which provides great help in offsetting inflation and the devaluation of the payout when it’s needed.
Best Use: Permanent insurance needs for an estate.
Choosing What’s Right For You
As with any life insurance policy, picking the best permanent one is largely tied to matching the policy with the need. If you need cheap yet long lasting insurance, a guaranteed universal life policy will be most affordable. If you’re looking to grow cash for yourself to access later, utilizing a survivorship policy is least plausible. Speaking with an agent who specializes in permanent insurance is highly necessary because of the great variances in the different types.