If you find that permanent life insurance is a good product for you in context of your financial planning needs, there are many different types to choose from. Two of the most common types of permanent insurance are whole life and universal life insurance.
- Whole life insurance offers steady premiums and opportunity for cash value accrual through the investment component.
- Universal life insurance offers flexibility by allowing you to make premium payments at any time and in any amount.
Whole Life Insurance
As the name states, whole life insurance covers you for your whole life. While premiums will be more expensive than what you will generally find in the term alternative, the premiums do something else for you – they build over time. This will result, if left untouched, in a cash value that will add to the final value of the policy. Unlike some universal life policies which allow for limited equity investing, with whole life policies, these excess premiums are not invested in the stock market, but rather are invested at the insurance company provider’s discretion. This does mean that you will likely be hampered in regards to the return you will enjoy through a whole life policy, but you also get the benefit of having level terms for your life – assuming you hold the policy until passing.
In a traditional whole life insurance policy, your scheduled premium payments remain level and the costs are generally the same each year you’re alive. Some whole life policies, however, offer a modified payment schedule. With this payment option, the required premium payments start lower when you’re younger, then increase to higher amounts where they will then level out for the remainder of your policy. Just be sure to read over your policy to determine the amount of your premium payments and the schedule in which they are required to be paid as they vary from policy to policy.
Whole life insurance is convenient if you need to access the cash generated by your policy in the event of a financial emergency. This loan is accessible without having to pay any taxes since policy loans are treated as debt. However, failure to pay back the loan will affect the overall cash value on the policy in the event of a death (the loan would be paid back via your death benefit proceeds).
Universal Life Insurance
Universal life insurance is another type of permanent life insurance policy, similar to a whole life insurance policy in the sense you can build up a cash value. With universal life insurance, however, you can make premium payments at any time and in any amount, which offers some flexibility. A portion of the universal life insurance monthly premium is put into the cost of the policy and another portion is invested so it can be used toward investment savings. One benefit of universal life insurance is that it provides a life insurance policy and allows you to build savings at the same time. In some cases, the investment will grow over time and eventually may be able to pay for the premiums of the policy. On the other hand, if you stop making premium payments or withdraw the built-up cash value, it can affect your coverage amount. As a result, you may need to put more cash in or – in extreme cases – surrender the policy, which can trigger negative tax consequences.
Generally, any excess premium payments you make can be allocated across separate accounts holding anything from stocks to bonds to mutual funds/annuities. Your investments though, are restricted by what your insurance company offers in terms of investment options for cash values, which vary widely from company to company. Make sure you find a company and policy that aligns with your investing preferences.
Modified Endowment Contracts (MECs)
If your permanent life insurance policy has too much cash value built up within it, either through extreme dividends accrued or through excessive deposits, it may be considered
a Modified Endowment Contract (MEC). This negatively affects the tax treatment of the
policy, particularly if withdrawals are taken before age 59 1⁄2. If you’re concerned about MEC considerations, please contact your financial advisor.
Whether you select whole or universal life insurance, permanent life insurance will provide you and your family with lifelong security. Your circumstances are unique to your own life, and you should speak with your advisor to determine what kind of life insurance is right for you. When you use our free tools to input your financial information, we can recommend a level of insurance coverage to help keep you and your family protected and on track for your long-term goals.
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