What is Permanent Life Insurance?
Permanent life insurance typically refers to life insurance plans that do not expire after a certain length of time. Unlike term insurance policies where the policyholder is likely to outlive the policy, permanent life insurance policies guarantee a death benefit after the policyholder’s demise as long as the premium payment is kept up to date. Permanent life insurance policies also carry a cash component in addition to the death benefit that the beneficiaries will receive. This cash component is very similar to an investment account in the sense that the owner can withdraw and borrow funds from the insurer by stating the policy as collateral (Reed, 2016).
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Two Type of Permanent Life Insurance
There are two main categories of permanent life insurance; universal and whole life insurance. Whole life insurance offers coverage for the entire lifetime of the policyholder and a cash component that grows at a steady and guaranteed rate while universal life insurance offers a policyholder a death benefit but the cash component’s growth depends on the market performance and offers that policyholder different premium structures to choose from (Reed, 2016).
Although permanent life insurance has considerably higher premiums than term life insurance, it is a good investment opportunity for buyers who have the financial means to cater for the premiums and require to set up ways to cater for expenses that are not time bound. For instance, buyers who would like to pay estate bills after their demise, instead of opting for a term life insurance, these kinds of buyers can opt for long term permanent life insurance. Buyers are also assured that a significant portion of the cash component can be recouped (with the exception of the surrender charges that the buyer pays upon purchase) from the insurer if the buyer decides to give up the policy
This policy can also be used as collateral on a loan from the insurer where the holder does not require any special credit checks or qualifications to make the application and does not have to pay back money loaned back to the insurer within a specified period of time. However, the holder must make sure that the total amount of the loan and the interest does not exceed the policy’s cash value because this will result in the termination of the policy (Kagan, 2018)
Apart from providing dependents with financial security after the holder’s demise, permanent life insurance is a tax favourable investment opportunity as it enjoys favorable tax treatment and the growth of cash value is mainly dependent on the percentage of tax-deferred (Kagan, 2018). Moreover, permanent life insurance policy loans are not considered taxable income and money can be taken out at will and death benefits will be paid without ever being subject to income tax deductions as long as premium limits are not exceeded.
Furthermore, upon purchase of a universal life cover, buyers are given the option of using the cash component to pay insurance premiums. This can be very useful in case the holder has had a financial emergency and is unable to pay his/her premiums. Moreover, taking a participatory permanent life cover form a mutual life insurance company can earn the holder dividends when the company exceeds its profit margins (Kagan, 2018). These dividends can then be used to pay existing premiums, expand the coverage of existing policies or take out as cash.
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Despite the higher rate of premiums typical of permanent life insurance policies, it has the benefit of acting as a great investment opportunity in addition to providing financial security to the holder’s dependents. It is therefore, a worthwhile financial option to consider for buyers who have the financial means to pay the premiums and desire a tax favourable way to save and borrow money.
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