The following article is a more comprehensive look at permanent coverage in support of our article featuring the Top 20 Best Permanent Life Insurance Companies. Composing such a list and knowing which companies are the so called “best” will vary depending on the type of permanent life insurance needed. Because the best life insurance company for you will depend on your need, based on your unique goals and objectives.
In the following article we will define permanent life insurance AND offer various instances when it makes sense to choose permanent life insurance over temporary life insurance.
What is Permanent Life Insurance?
When defining permanent life insurance it is important to contrast it with what it is not. Permanent life insurance is not term life insurance. Rather, it refers to a broad category of life insurance that offers ongoing benefits for the life of the insured. Life insurance that offers permanent benefits is distinguished from temporary life insurance that offers benefits for a set period of time.
When suggesting that permanent life insurance offers permanent benefits, we are talking about a permanent death benefit once the policy premium is completely paid for (or paid up) AND some level of accumulation of cash value within the policy. Permanence and accumulation of cash value are the 2 factors that separate permanent life insurance from term life insurance.
Permanent Life Insurance vs. Term Life Insurance
Buying vs. Renting a Death Benefit
Temporary life insurance, more commonly known as term life insurance, does NOT offer a permanent death benefit. Term life insurance offers a specified amount of death benefit for a specified term.
A longer term or higher death benefit (as well as the age and health rating of the individual policy applicant) determines the cost of this insurance. There is no cash accrual or other permanent benefit of any kind. This is why we often refer to term life insurance as “renting a death benefit” and highly recommend purchasing convertible term life insurance if you choose to go this route.
For the above reasons, term life insurance is inexpensive when compared to any type of permanent life insurance. The comparative low cost of term life insurance is why financial entertainers like Dave Ramsey tout opinions like “buy term and invest the difference”. The fact is, term life insurance is NOT “bought” but rather rented for a defined period. This is not me being “cagey” about term life insurance. Rather, it is the simple fact of how term life insurance is packaged.
Different Types of Term Life Insurance
There are different types of term life insurance such as 5, 10 and 20 year level term. These policies offer coverage at a fixed premium for a set period of time. Upon expiration of the term, the premiums for the coverage will typically skyrocket, so that the policy will not longer be practical to maintain and a new term policy may be needed. There is also graduated term insurance which isn’t fixed for a set term of more than a year and offers premiums that increase gradually year after year.
Convertible term life insurance allows the temporary term policy to be converted to a permanent life insurance policy if elected within the policy period. We highly recommend this approach because it preserves the option to convert from temporary to permanent life insurance for any number reasons.
For example, if a person’s health declines, he or she may no longer qualify for renewable term and a permanent life insurance may be needed.
Because we advocate using permanent life insurance for tax advantaged cash value accumulation through paid up additions AND other approaches, we suggest that convertible term will allow you increase your base of permanent life insurance as your needs and budget increase.
Enough about term life insurance…now to contrast permanent life insurance.
2 Types of Permanent Life Insurance
The 2 broad TYPES or categories of permanent life insurance are:
- Whole Life Insurance
- Universal Life Insurance
The 2 types of permanent life insurance are different animals both philosophically and practically. As analogy, if most universal life products can be referred to as a thoroughbred racehorse, most whole life products may be deemed the Clydesdale workhorse. The exception may be guaranteed universal life which is similar to whole life in terms of offering conservative cash value growth.
The difference between the whole life workhorse and the universal life racehorse is how life insurance assets are invested AND the level of guaranteed growth within the policy. Flexibility of premiums is also an important consideration when differentiating these 2 major types of permanent life insurance.
Key Differences [Whole Life Insurance vs. Universal Life Insurance]
Whole life policy returns are conservative and based upon the insurance company’s pool of extremely conservative investments and thus are guaranteed at rates which have been relatively consistent over the last 200 years. In addition, if the whole life insurance company’s pool of investments performances well, then policy holders, in a mutual whole life insurance company, will receive a higher return, project as non-guaranteed, which is based upon a return of premiums to policy holders.
Within the arena of whole life insurance, policies mostly differ in terms of the “bells and whistles” attached and what the company chooses to offer policy holders. Some companies, for example, will offer better options for paid up additions riders in order to facilitate cash value accumulation strategies such as infinite banking.
For example, Penn Mutual, offers more flexibility concerning paid up additions then some other competitors because the company requires that additional payments must be made only a portion of the years that paid up additions are scheduled. Other companies such as Mass Mutual currently, may require full payment of scheduled paid up additions every year.
Whole life policies may also differ in design depending upon the goal sought by the policy applicant. If a permanent death benefit and lower costs is preferred, then the policy will NOT be designed to enhance cash value accumulation AND vice versa if cash accumulation is sought over permanent death benefit.
Universal life policy returns depend upon the type of product selected and may be either guaranteed, tied to a market index OR depend upon the success of the financial markets, and investments vehicles such as mutual funds. Policies often offer a floor, to prevent market losses of greater than zero AND may cap gains at a certain rate depending upon the risk of the given index.
Guaranteed Universal Life Insurance ties policy cash value growth to a fixed interest rate of return
Indexed Universal Life Insurance ties policy growth to a selection of market indexes such as the S&P 500
Variable Universal Life Insurance ties policy growth to investments in the financial markets such as mutual funds or even hedge funds
Quick Tip: Varying Cost of Permanent Life Insurance
Critics of whole life insurance often question the comparatively higher cost of whole life insurance verses term life or even universal life insurance. However, these opinions often do not carefully consider the fact that as a whole life investor, you’re purchasing both a permanent death benefit AND guaranteed cash value growth with tax advantages. Universal life insurance if non-guaranteed only offers a potential return based upon whatever investment option is selected. Guaranteed universal life insurance may offer the same level of certainty but of course may be more expensive as well.
So the key with universal life, is that a policy can be designed to accommodate the level of risk, reward that you’re seeking. If you have more of a risk taking preference, then a variable policy may offer the chance for greater market returns with the greater risk of losses. Thus, the potential opportunity for higher returns due to stock market investing should be weighed against greater stability and predictable returns year after year.
Private Placement Life Insurance
Within the variable life genre of permanent life insurance there is a little known variation called private placement life insurance. This is a little known and highly customized type of variable life insurance that is suitable for higher net worth individuals. For someone that is interested in maintaining a high degree of investment control AND obtaining the tax advantages of permanent life insurance, this is a strong strategy to consider.
Retirement or Investment Funds
By nature, term life insurance cannot contribute to funding retirement or providing future capital for investment because it doesn’t build cash value. Permanent life insurance can do this by allowing cash value to building inside the policy in a tax advantaged environment. This is a key aspect of cash value life insurance AND can be applied as part of a retirement planning with life insurance strategy OR as a way to create private financing for real estate or other investments.
When cash value accumulates inside a permanent life insurance policy, tax advantages are allowed under current rules because it is a life insurance policy. Rather than having taxable gain on 100% of the growth of your accounts, your life insurance cash value can grow tax free, increasing you overall financial leverage AND return on investment return on investment. This is allowed due the payment of whole life dividends which are basically defined as a “return of premiums” to the policy holders rather than regular income. This is a potential key benefit to ALL permanent life insurance but especially traditional whole life insurance policies. It is also a primary benefit in private placement insurance which as discussed above.
In many states, permanent life insurance, along with a number of other asset classes, gets special asset protection under state laws. This means that the cash value in your policy NOT ONLY gets special tax treatment, but may also get protection from lawsuits and rogue creditors. This benefit also relates back to retirement planning, and helping you create a secure future.
5 Reasons to Choose Permanent Life Insurance
For all of the above reasons, permanent life insurance offers many benefits that temporary term life insurance by nature cannot offer. So, it’s easy to find 5 reasons to choose permanent life insurance. Let’s review:
- Permanent death benefit vs. renting one
- Peace of mind if health changes
- Accruing cash value for secure retirement and/or investing
- Tax advantaged growth and leverage
- Asset protection
You can go to our actual article, the Top 20 Permanent Life Insurance Companies. You can also check out our snapshot of the current crop of top carriers offering permanent coverage below.
|Penn Mutual||WL, IUL, VUL|
|MassMutual||WL, LTCI Combo, LTCI|
|New York Life||WL, LTCI|
|Foresters||WL, UL, VUL|
|Lafayette Life||WL, LTCI Combo|
|Ohio National||WL, UL, VUL|
|Guardian||WL, UL, VUL, LTCI Combo|
|Northwestern Mutual||WL, UL, VUL|
|Minnesota Life||WL, IUL, LTCI Combo|
|AIG||WL, UL, IUL, VUL|
|John Hancock||UL, IUL, VUL, LTCI Combo|
|Protective Life||UL, IUL, VUL|
|Transamerica||WL, UL, IUL, VUL, LTCI|
|Pacific Life||UL, IUL, VUL, LTCI Combo|
|North American||UL, IUL|
|AXA||WL, UL, IUL, LTCI Combo|
|Principal Financial||UL, IUL, VUL|
|Voya||UL, IUL, VUL|
|Prudential||UL, IUL, VUL|
|American National||WL, UL, IUL, VUL|
|State Life||LTCI Combo|
|Lincoln Financial||UL, IUL, VUL, LTCI Combo|
|Nationwide||WL, UL, VUL, LTC Combo|
Thank you for checking our our article on permanent life insurance. For more information about permanent life insurance, infinite banking, private placements or protecting your loved ones, call or e-mail us today.