Definitions are important
It is essential to understand the different types of life insurance available to you and their differences.
Permanent life insurance refers to a category of insurance policies that never expire. Typically permanent life insurance includes a savings component as part of the policy on top of the death benefit.
Two main types of permanent life insurance are universal life insurance and whole life insurance.
Let’s dissect these to clearly understand the differences between them.
Universal life insurance
Universal life insurance falls under permanent life insurance in that the policy provides protection for the insured’s entire lifetime. It also has a cash component which has a deferred tax value.
This means that the total cash value is not taxable.
You can lower or raise your premium amount within certain prescribed limits.
This is to keep the cost below the expense of whole life coverage.
The downside of this is that it does not have the same certainty as whole life benefits.
Should you pay the minimum premium for too long under a universal life insurance policy, your death benefit may be reduced, and your cash value growth will be stunted.
Whole life insurance
Whole life insurance is similar to universal life insurance in that it also provides insurance cover for the entire lifetime of the insured (and is not for a fixed term). It also has a tax-free cash growth component.
Thirdly, it gives the insured access to the cash value while still alive.
It differs from whole life insurance because it provides guaranteed cash value growth, does not allow for flexibility regarding premium amounts, and is thus more expensive. The death benefit is also guaranteed (unlike the whole life scenario).
Whole life insurance often pays out a dividend not found in universal life insurance.
Pro’s and con’s of permanent life insurance
If you know that the beneficiaries will need the insurance money irrespective of when you die, it’s probably a good idea to opt for permanent life insurance.
In other words, the insurance cover is not provided simply for a limited-term, during which time the beneficiaries will definitely need the money should you pass away.
An example of a situation in which you would opt for permanent life insurance would be when you have a permanently disabled child who will always depend on you for support. Then, when you die, the insurance payout will be critical to continue supporting the child.
You may opt for permanent life insurance to cater for the funeral costs around your death as well as in situations in which you want to assist heirs to pay hefty estate taxes after you die.
Which permanent insurance option is better for you?
As you can see, the differences between insurance policy products can be minuscule and are designed with clients’ particular needs in mind.
One client will have a definite need for the possibility of varying premium amounts and will be prepared to accommodate the downside of this choice. On the other hand, another client has no need for this and will be well advised to opt for whole life insurance with high guarantees.
Everybody has different needs and circumstances. Therefore, your insurance policy needs to cater to your specific situation. There is no one size fits all answer to this problem.
This is why it is so important to get professional, trusted insurance advice from a trustworthy broker with a good work ethic and ethical track record.
