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How Does Permanent Life Insurance Work?

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Are you someone who likes to plan for the future? Are you
considering a life insurance premium, or simply want to know how they work?
This article’s got you covered. In this guide, we outline the basics of
permanent life insurance, the different types, and how to choose the best life
insurance for your needs.

Quick article guide:

     
What Are The Features And Benefits Of Permanent Life
Insurance?

     
What Are The Different Types Of Permanent Life Insurance?

     
What To Keep In Mind When Choosing Life Insurance.

     
Alternatives To Permanent Life Insurance Policies.

If you’d like to learn more about permanent life insurance,
read on!

What Is Permanent Life Insurance?

Permanent life insurance is a type of life insurance that offers coverage for the entire lifetime of the insured. Permanent life insurance, like all types of life insurance, provides a death benefit to the beneficiaries upon the insured’s death.

How Does Permanent Life Insurance Work?

Permanent life insurance provides lifelong coverage and a death benefit to your beneficiaries – but how does it work? Let’s take a look at the key components and benefits of this type of insurance:

1. Lifelong coverage: One of the main benefits of permanent life insurance is the lifelong coverage it provides. As long as the policy is active and the premiums are paid, your loved ones will receive a death benefit when you pass away.

2. Premium costs: Permanent life insurance premiums are typically more expensive than temporary life insurance, known as term life insurance. This is because a portion of the premium payment goes into a cash value component. Premiums can be paid monthly, semi-annually, quarterly or monthly.

3. Cash Value Component: A portion of your premium payments goes into an investment account, which accumulates value over time. You can access this cash component earlier for various purposes, such as to fund a child’s education.

4. Tax Advantages: The growth of the cash value is typically tax-deferred, meaning you won’t have to pay taxes on the growth until you withdraw the funds.

5. Premium payments: If you miss a premium payment there may be a grace period that allows you to make a payment without losing coverage, however, if your policy lapses you may lose the death benefit and any accumulated cash value.

6. Riders: Riders are extra benefits that can provide more coverage or cover specific needs. These are customizable. Common riders include:

6.1 Accelerated Death Benefit: This rider allows you to access a portion of the death benefit if you are diagnosed with a terminal illness or have a specified medical condition.

6.2 Waiver of Premium: This rider waives your premium payments if you become disabled and are unable to work.

6.3 Long-term Care: This can provide for long-term care expenses, such as a nursing home or at-home care.

6.4 Accidental Death: This rider doubles your death benefit payout if you die in an accident.

7. Estate Planning: The death benefit can help your beneficiaries with funeral costs, outstanding debts, and estate taxes.

In short, you will need to pay life insurance premiums up until death, after which the accumulated cash value will be paid out to your family or beneficiaries. Permanent life insurance comes with several add-ons, known as riders, that may alter your premium payments but can provide for long-term care or account for accidental death with little additional cost.

Different Types of Permanent Life Insurance

Now that you know how permanent life insurance works, let’s look into the different types of permanent life insurance and their distinguishing features:

1. Whole Life Insurance: Whole life insurance provides a guaranteed death benefit, as well as a cash value component that grows at a fixed rate. Premiums for whole life insurance are typically higher than those for term life insurance, but they remain level for the life of the policy.

2. Universal Life Insurance: Universal life insurance is more flexible than whole life insurance. It allows you to adjust your premiums and death benefit payouts over time, depending on your financial need. This type of insurance also has a cash value component, but it grows at a more variable rate.

3. Variable Life Insurance: Variable life insurance fluctuates, as the policyholder can invest their cash value into stocks, bonds or mutual funds. Therefore, the cash value and death benefit payout varies based on how well the investments perform.

Permanent life insurance offers lifetime premiums up until death, unlike term insurance which stops after a certain period. All three types of permanent life insurance offer cash value components but vary based on what you can do with the cash value. Whole life insurance pays it out to beneficiaries after death and can be used as collateral for a loan, universal life insurance allows you to adjust the cash value over time, and variable life insurance allows you to invest the cash value.

Factors to Consider When Choosing Permanent Life Insurance

When choosing permanent life insurance, there are several factors to consider to ensure that you select the right policy for your needs:

1. Financial Goals: Consider your long-term financial goals and how permanent life insurance fits into your overall financial plan. Determine whether you need the cash value accumulation and lifelong coverage that permanent life insurance provides.

2. Premium Affordability: Remember to look over your budget and make sure you can comfortably afford your premium payments.

3. Risk Tolerance: Consider your risk tolerance when choosing the type of permanent life insurance. Whole life insurance offers guaranteed growth, while universal life insurance and variable life insurance have variable growth based on investment performance.

4. Policy Flexibility: Evaluate the flexibility of the policy. Does it allow you to adjust premiums and death benefits as your needs change? Can you access the cash value easily if needed? It helps to keep these points in mind before choosing your life insurance premium and to compare several premiums wherever possible.

Alternatives to Permanent Life Insurance

If you’ve compared permanent life insurance policies and realized the premiums are too pricy or don’t offer what you need, there are more affordable options available.

1. Term Life Insurance policies are much cheaper than permanent life insurance, and encompass the following:

      Shorter terms: Typically, coverage lasts 10, 20 or 30 years. If you outlive your term life insurance, unfortunately, you do not get a life insurance payout and will need to take out another life insurance premium.

      No cash value: Term life insurance does not offer a cash value component, and typically offers a lower payout after death than permanent life insurance.

2. Retirement or investment accounts. Rather than pay for a life insurance premium, you can invest your money in an RRSP. This allows you to accumulate funds for retirement and provides a financial cushion for any eventualities. 

Final Thoughts

Permanent life insurance offers lifelong cover, accumulates cash, and comes with extras to help in cases of chronic illness or accidental death. However, this type of insurance is more expensive than term life insurance and needs considerable financial planning and forethought.

If permanent life insurance doesn’t align with your financial situation or goals, alternatives such as term life insurance or other investment accounts may be more suitable.

Whatever you choose, remember to do your research and make an informed decision to help you control your financial future and provide for your loved ones even after you are no longer around. 

Author Bio

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Mohamed Konate

Mohamed Konate is a personal finance expert, blogger, and marketing consultant based out of Toronto. He is a former financial services professional who worked for many years at major Canadian financial institutions where he managed the marketing strategy around various financial products ranging from credit cards to lines of credit. Mohamed is passionate about personal finance and holds a Bachelor in Business Administration from the University of Quebec (Montreal) and a Master in International Business from the University of Sherbrooke (Quebec).He is also the author of the Canadian Credit Card Guidebook.