These daily financial tips are designed to be short ideas covering different aspects of family and business finances. They are short pieces intended to provide information to enable individuals, families and businesses to make informed financial decisions. Not all tips will apply to every situation, but over the course of a year, most financial topics will be covered. Check in regularly and share with friends and associates.
This week, I am covering different aspects of insurance as insurance strategies are critical foundations to any financial plan. Yesterday we covered features of Term Life insurance, today we will discuss features of Permanent insurance. Both Term Life and Permanent life insurance payout tax free lump sums of cash to beneficiaries in the event of death. The primary difference between the two is how the premium costs are structured.
While Term Life and Permanent life payout in the event of death, they are each focused on protecting different stages in life. One is not exclusive of the other, they are complementary. Think of Term Life providing protection against pre-mature death or providing protection for shorter term needs, such as debts (loans and mortgages) and income protection for young families. Permanent insurance is intended for protection against longer term needs, such as: funeral expenses, estate taxes, and legacy needs. Term Life is insurance you ‘may’ collect on, while permanent insurance is coverage you ‘will’ collect on – its only a question of when.
There are many different forms of Permanent Insurance. They may be referred to as Whole Life, Participating Whole Life, Universal Life, etc. There will be differences in the ability to shelter cash investments within the different permanent policies and how the premiums are guaranteed, but they all share the commonality that coverage will last a lifetime and pay out at some point, whether you live to normal life expectancy of 83 or 103.
While premium costs in the short term may appear to be higher than term life, factoring in lifetime values and costs, permanent insurance long term costs are generally less. The biggest difference between Permanent insurance policies is the ability to build cash values or savings within the policies. Permanent Insurance policies may be protection only strategies that payout the face value of the policy in the event of death. Some Whole Life (including Participating Whole Life) and Universal Life policies can have the added benefit of accumulating cash values and investment values in them which increase in value over time. In the event of death, both the cash values and face values of the policies are paid out to beneficiaries on a tax free basis.
Permanent Life premiums are generally fixed/guaranteed for the life of the policy. They are not always guaranteed, so it is important to check the policy and get clarity from your insurance advisor. Permanent Life premiums can also be fixed/guaranteed for a fixed period of time (ie 10 yrs, 15 yrs, 20 yrs), similar to paying down a mortgage – you pay for a specified period of time (thereby fixing your long term costs) and the coverage lasts a lifetime. Time specific policies are effective tools for policies covering children. Some Universal Life policies have variable premium scales that often increase with time. Check with a licensed insurance advisor to understand the details of a policy to determine which is most appropriate for your lifestyle and goals. Permanent Life policies have more components and flexibility than term life policies so it is important to understand which is best for your circumstances.
Most families will combine both Term Life and Permanent Life coverages to ensure both their short term and longer term needs are protected. If budget does not permit maximizing coverage, lower levels of permanent insurance can start a plan and then added to over time. Most term life policies will also have ‘convertibility’ features which allow policy holders to convert some or all of their term life coverage to permanent life coverages at a later date. Best to discuss options and put a strategy in place with a licensed insurance advisor.
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