Term life insurance is useful for people looking for a basic low-cost policy. For a more comprehensive coverage, permanent life insurance policies can be considered.
What is Permanent Life Insurance?
Permanent life insurance is meant to provide lifelong protection. Generally, the policy includes a wealth accumulation component, which is tax deferred. These policies thus work as an investment vehicle, in addition to providing insurance against the untimely death of the insured person. The most basic form of life insurance carries a fixed premium, that has to be paid by the policy owner, and in turn, the beneficiaries are entitled to a fixed amount of ‘death benefit’. The insured person has the right to borrow against the built-up cash value of the policy, in case of contingencies. In fact, withdrawals up to the amount of premium are not taxed. Hence, the policy functions as an asset to the insured person, and provides coverage to the beneficiary. Of course, the insured person can avail a loan against the amount of cash value only after a period of time. In case the amount of loan and the interest on the loan exceed the cash value of the policy, the policy gets terminated. Otherwise, the beneficiary can claim the face value of the policy as ‘death benefit’. In case the insured person outlives the term of the policy, he can claim the face value of the policy from the insurance company.
Term Life Vs. Permanent Life Insurance Policies
Premium: The amount of premium in case of a term life policy is lower than that charged on a permanent life insurance policy. Since it is more expensive than a term life insurance policy, the latter is a cheaper option for people with limited income.
Savings Component: A permanent life insurance policy generally has a savings component, unlike a term life insurance policy. The latter only provides a predetermined amount of money, stated in the insurance contract as ‘death benefit.’ However, some people might view the wealth accumulation component as forced savings, that require them to pay higher premiums, fees, and commission. Moreover, the presence of better investment opportunities may result in a permanent life insurance policy under performing as an investment.
Asset for Whom?: Permanent life insurance policies can function as an asset, since the insured person (policy owner) can use the cash value of the policy and obtain a loan, provided the amount of loan and the interest payment is less than the cash value of the policy. Moreover, if the insured person (policy owner) outlives the term of the policy, he can claim the face value of the policy from the insurance company. However, the policy does not allow the insured person to claim the amount of the policy if he outlives the stated term. Moreover, his beneficiaries are allowed to claim the ‘death benefit’ only if he dies within the stated term of the policy. Hence, it is evident that permanent life insurance can function as an asset for both, the insured and the beneficiary, while a term life insurance can at best be an asset for the beneficiary.
Age and Health Factor: Term life insurance policies are suitable for people who have good health, and are less than 65 years of age. Many companies would be unwilling to insure people who are over the age of 65. Insurance companies may feel that after the age of 65, a ‘death benefit’ is imminent. Hence, a permanent life insurance policy with higher premiums may be a better product to market.
Types of Permanent Life Insurance
Whole Life Insurance: A whole life insurance policy is meant to provide insurance for the entire lifetime of a person. The policy has a saving and an insurance component. A part of the premium paid accumulates over time and earns interest, while the remaining premium is the amount charged for coverage. This, in turn, may result in reducing the amount of premium that has to be paid by a person during his lifetime.
Universal Life Insurance: In this case, the insurance company allows a person the flexibility of shifting the premium between the saving and the insurance component. In case the savings component earns less, he can use it to pay the premium for insurance. Hence, the cash value of the investment grows at a variable rate.
Variable Life Insurance: In case of variable life insurance, an insured person allocates a portion of his premium to investments. If the investments do well, he can use the proceeds to pay the premium for the insurance component. However, this a risky proposition which may result in lower ‘death benefit’ to the beneficiary, thus, thwarting the very purpose for which life insurance was designed.
While choosing a policy, the purpose of life insurance should be kept in mind. It is never a good option to focus on the investment component, while ignoring the insurance component. Doing so may result in denying the beneficiaries the right to compensation on account of death of a loved one.