Life insurance policies that do not expire are referred to as permanent life insurance. Permanent life insurance usually includes a death payout and a savings component.
What are the different types of permanent life insurance?
Both whole and universal life provide lifelong coverage and tax-free cash gain, but they are structured differently. Whole life and universal life are the two most common types of permanent life insurance. Whole life insurance provides coverage for the insured’s whole life, and the funds grow at a guaranteed set rate. Universal life insurance, in addition to a death benefit, provides a savings component that varies with the payment frequency and market performance where the premiums (funds) are invested.
Whole life insurance
- Guaranteed cash values
- Guaranteed insurance payout
- Guaranteed premiums
- No non-guaranteed feature in whole life insurance
Universal insurance
- Guaranteed cash values on some portion of the policy
- Choose your investment options<
- Generally less expensive than whole life insurance
- Flexibility in premium payments
Understanding Permanent Life Insurance
Unlike term life insurance, which guarantees payment of a defined death benefit for a set number of years, permanent life insurance lasts the insured’s whole life (thus the name), unless the policy is lapsed due to nonpayment of premiums. Premiums for permanent life insurance are used to sustain the policy’s death benefit and allow the policy to accumulate cash values. The policy owner can use the cash value to borrow funds or, in some cases, withdraw cash directly to help fulfil needs such as paying for a child’s college tuition or medical expenditures. After purchasing a permanent life insurance policy, there is usually a waiting period during which borrowing against the savings part is not authorised. This helps the fund to accumulate enough cash. The insurance policy and all coverage will be terminated if the total unpaid interest on a loan, plus the outstanding loan sum, exceeds the cash value of the policy. Permanent life insurance policies have a tax advantage. The cash value grows on a tax-deferred basis, which means that the policyholder does not pay taxes on any earnings as long as the policy is active. Cash values, after the specific premium restrictions are met, can be taken out of the policy without being taxed because policy loans are normally not considered taxable income. Before the term life insurance policy expires, several companies give the option to convert it to permanent life insurance. Also, called the conversion feature of the term life insurance. Once you’ve decided on the policy that’s suitable for you, do your homework on the companies you’re considering to ensure you’re getting the best permanent life insurance at the best rates.
Permanent Life Insurance vs. Term Life Insurance
Different people require different types of insurance at different times in their lives. Term life insurance is popular because of its low premiums, although many term policies expire before the insured’s death. While the goal is to have paid off most debt and other financial obligations by that time, as well as amass enough savings to eliminate the need for a large amount of life insurance, some people may find that they prefer ongoing coverage and savings opportunities, and thus would benefit from a permanent policy. As a result, many term life insurance includes the opportunity to convert to permanent policies at a later date, typically without the need to re-qualify through a medical exam or questionnaire. For someone with medical difficulties that would make a new policy quite expensive, or chronic ailments that necessitate continuous spending that might be deducted from the savings component, such a provision of conversion sounds appealing. Permanent life insurance rates are substantially higher than term life insurance premiums, but most people who want to invest in such plans have made enough money in their lives to afford it. They can also use it as a tax-advantaged investment vehicle to fulfil the needs of lifetime dependents or for estate planning purposes – all thanks to the additional savings opportunity.
Key Takeaways
- Unlike term life insurance, permanent life insurance has a savings component in addition to death benefit.
- Whole life and universal life are the most common types of permanent life insurance.
- Tax advantages are available for permanent life insurance contracts.
Einsured.ca is your one-stop shop for all types of personal insurance. From excellent life insurance to investments and savings plans to high-quality, inexpensive insurance for newcomers and Super Visa applicants, there is something for everyone. Please call our office for a no-cost consultation. Happy to help with low-cost, budget-friendly, flexible insurance options. If you need any support, you can book a free consultation with me.
— Aman Ahuja
Financial Security Advisor
[email protected]
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