What is a permanent life insurance?

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Permanent life insurance is life insurance that covers the remaining lifetime of the insured. A permanent insurance policy accumulates a cash value up to its date of maturation. The owner can access the money in the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and receiving the surrender value.

The three basic types of permanent insurance are whole life, universal life, and endowment.

1. Whole life

Whole life insurance provides lifetime coverage for a set premium.
a. Level premium whole life

Level premium whole life insurance (sometimes called ordinary whole life, though this term is also sometimes used more broadly) provides lifetime death benefit coverage for a level premium. Whole life premiums are much higher than term insurance premiums, but because term insurance premiums rise with increasing age of the insured, the cumulative value of all premiums paid under whole and term policies are roughly equal if policies are maintained to average life expectancy.

Whole life insurance may prove a better value than term for someone with an insurance need of greater than ten to fifteen years due to favorable tax treatment of interest credited to cash values. However, for those unable to afford the premium necessary to provide adequate whole life coverage for their current insurance needs, it would be imprudent to purchase less coverage than is adequate as whole life insurance rather than purchase an adequate level of term to cover their current need.

The advantages of whole life insurance are its guaranteed death benefits; guaranteed cash values; fixed, predictable premiums; and mortality and expense charges that do not reduce the policy’s cash value. The disadvantages of whole life are the inflexibility of its premiums and the fact that the internal rate of return of the policy may not be competitive with other savings and investment alternatives.

The life insurance manual defines policy dividends as refunds of premium over-payments. They are therefore not exactly like corporate stock dividends, which are payouts of net income from total revenues.

Modified whole life insurance features smaller premiums for a specified period of time, followed by higher premiums for the remainder of the policy.

Survivor ship life insurance is whole life insurance insuring two lives, with proceeds payable after the second (later) death.

b. Limited-pay whole life

Another type of whole life insurance is limited-pay whole life insurance, whose premiums are paid over a specified period, commonly ten or twenty years, after which no additional premiums are due. Benefits are sometimes paid out at the age of 65; other ages can include 75, 85, and 100.

Other limited pay policies do not pay out at a set age, but become “paid up”, leaving the policyholder with a guaranteed death benefit and no further premiums to pay.

Single-premium whole life insurance requires only one premium payment, paid at policy inception.

2. Universal life coverage

Universal life insurance (UL) is a relatively new insurance product, intended to combine permanent insurance coverage with greater flexibility in premium payments, along with the potential for greater growth of cash values. There are several types of universal life insurance policies, including interest- sensitive (also known as “traditional fixed universal life insurance”), variable universal life (VUL), guaranteed death benefit, and equity-indexed universal life insurance.

Universal life insurance policies have cash values. Paid-in premiums increase their cash values; administrative and other costs reduce their cash values.

Universal life insurance addresses the perceived disadvantages of whole life – namely that premiums and death benefits are fixed. With universal life, both the premiums and death benefit are flexible. With the exception of guaranteed-death-benefit universal life policies, universal life policies trade their greater flexibility off for fewer guarantees.

“Flexible death benefit” means the policy owner can choose to decrease the death benefit. The death benefit can also be increased by the policy owner, usually requiring new underwriting. Another feature of flexible death benefit is the ability to choose option A or option B death benefits and to change those options over the course of the life of the insured. Option A is often referred to as a “level death benefit”; death benefits remain level for the life of the insured, and premiums are lower than policies with Option B death benefits, which pay the policy’s cash value—i.e., a face amount plus earnings/interest. If the cash value grows over time, the death benefits do too. If the cash value declines, the death benefit also declines. Option B policies normally feature higher premiums than option A policies.

3. Endowments

Endowments are policies which will pay a lump sum at either the death of the insured or after a set term, called the policy’s maturity. Endowments require higher premiums than whole life and universal life policies because of the additional lump sum benefit at the maturity of the policy. Endowments are not technically permanent insurance because they do not cover the insured’s lifetime, however they are commonly included in this class because of their high premiums.
The US Technical Corrections Act of 1988 tightened the rules on tax shelters such as modified endowments. These follow the same tax rules as annuities and IRAs.

Endowments mature and are paid out after a specified period (e.g. 15 years) or at a specified age (e.g., 65), whether the insured is alive or has already died.

a. Money back policy

A money back policy is a variant of the endowment plan. It gives periodic payments over the policy term. To that end, a portion of the sum assured is paid out at regular intervals. If the policy holder survives the term, he gets the balance sum assured. In case of death over the policy term, the beneficiary gets the full sum assured.[20]

b. Accidental death

Accidental death insurance is a type of limited life insurance that is designed to cover the insured should they die as the result of an accident. “Accidents” run the gamut from abrasions to catastrophes but normally do not include deaths resulting from non-accident-related health problems or suicide. Because they only cover accidents, these policies are much less expensive than other life insurance policies.

Such insurance can also be accidental death and dismemberment insurance or AD&D. In an AD&D policy, benefits are available not only for accidental death but also for the loss of limbs or body functions such as sight and hearing.

Accidental death and AD&D policies very rarely pay a benefit, either because the cause of death is not covered by the policy or because death occurs well after the accident, by which time the premiums have gone unpaid. To know what coverage they have, insureds should always review their policies. Risky activities such as parachuting, flying, professional sports, or military service are often omitted from coverage.

Accidental death insurance can also supplement standard life insurance as a rider. If a rider is purchased, the policy generally pays double the face amount if the insured dies from an accident. This was once called double indemnity insurance. In some cases, triple indemnity coverage may be available.

c. Senior and pre-need products

Insurance companies have in recent years developed products for niche markets, most notably targeting seniors in an aging population. These are often low to moderate face value whole life insurance policies, allowing senior citizens to purchase affordable insurance later in life. This may also be marketed as final expense insurance and usually have death benefits between $2,000 and $40,000. One reason for their popularity is that they only require answers to simple “yes” or “no” questions, while most policies require a medical exam to qualify. As with other policy types, the range of premiums can vary widely and should be scrutinized prior to purchase, as should the reliability of the companies.

Health questions can vary substantially between exam and no-exam policies. It may be possible for individuals with certain conditions to qualify for one type of coverage and not another. Because seniors sometimes are not fully aware of the policy provisions it is important to make sure that policies last for a lifetime and that premiums do not increase every 5 years as is common in some circumstances.

Pre-need life insurance policies are limited premium payment, whole life policies that are usually purchased by older applicants, though they are available to everyone. This type of insurance is designed to cover specific funeral expenses that the applicant has designated in a contract with a funeral home. The policy’s death benefit is initially based on the funeral cost at the time of prearrangement, and it then typically grows as interest is credited. In exchange for the policy owner’s designation, the funeral home typically guarantees that the proceeds will cover the cost of the funeral, no matter when death occurs. Excess proceeds may go either to the insured’s estate, a designated beneficiary, or the funeral home as set forth in the contract. Purchasers of these policies usually make a single premium payment at the time of prearrangement, but some companies also allow premiums to be paid over as much as ten years.

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