Permanent and Whole Life Insurance
Permanent and Whole Life Insurance is different from term insurance, because it offers both death benefit protection, as well as a cash value component. It also differs because as the name suggests, it does not have a time limit like term insurance, but rather is intended to last for the remainder of the insured’s lifetime – provided that the premium is paid.
There are many different types of permanent life insurance. The two primary types of permanent life insurance are known as Whole Life and Universal Life insurance. Whole life insurance offers coverage for the full lifetime of the insured, and its savings can grow at a guaranteed rate. Universal life insurance also offers a savings element in addition to a death benefit, but offers different types of premium structures and earns based on market performance.
Whole Life Insurance
The simplest type of permanent life insurance coverage is whole life. With this type of coverage, the premium amount is locked in, and will remain the same throughout the entire lifetime of the policy. This can be helpful for those who need to stick to a budget. It also means that if a person purchases a whole life policy at a very young age, they will still pay the same amount of premium when they get older – regardless of advancing age, or even an adverse health issue.
In some cases, where a person’s pre-existing conditions require the individual to buy high-risk life insurance, some graded whole life policies are the only option. The cash that is in the cash value (see below for cash value explanation) component of a whole life insurance policy is allowed to grow on a tax-deferred basis. This means that the gains on these funds will not be taxed until or unless they are withdrawn – allowing them to compound exponentially over time.
At first, the cash in a whole life insurance policy will grow slowly. This is because the majority of the early premium dollars will go towards paying the agent’s commission and the insurance costs. However, over the years, the cash in a whole life policy can steadily grow, often with a minimum guaranteed rate of return.
Some whole life insurance policies will even provide dividends to their policyholders. Because these are a return of premium to the policyholder, they are also not taxed. Dividends can also help the cash value in a policy grow significantly – although they are never guaranteed.
Understanding “Cash Value”
When an insurance policy contains a guaranteed cash value for a guaranteed premium, it means that the premium is larger at the beginning of the policy than it would be in a term policy, so the additional premium can be invested in a “separate account” controlled by either the insurer or the policyholder, in order to grow the cash value.
Whatever gains are earned can be used in a few different ways: to increase the death benefit, to borrow against for some later use, or to keep the policy in effect so that you can stop paying monthly premiums. If you have a cash value policy, it is best to hold it until death or retirement so that you can allow for probable gains.
Tax Advantages of Permanent Life Insurance
Cash value accumulates on a tax-deferred basis, similar to assets in most retirement and college savings plans. Also, death benefits that are paid to the beneficiary are generally are not subject to federal income tax.
A Closer Look at the Tax Benefits of Life Insurance
These tax benefits within universal life insurance policies are similar to 401ks and IRAs. Annual earnings on the investment part of the policy do not get taxed, and any taxable gains when cashing out on a policy can be reduced by the amount of insurance protection the plan provides. Furthermore, in the case of death, the policyholder’s gains usually are not taxed.
Survivorship Life Insurance
With a Survivorship Life Insurance policy, there is more than one person that is covered by the policy purchased. The policy can be set up in a couple of different ways. One way is first to die. With this type of policy, the coverage is designed to pay out when the first person passes away.
In most instances, the premium that is charged for this type of policy can be higher than for a policy on just one insured. However, it can often be less than purchasing two separate life insurance policies.
There are also joint and survivor, or last to die life insurance policies. With these policies, the coverage pays out when the second person on the coverage passes away. These can either be term or permanent coverage. These policies can also have other advantages, in that they typically will cost less than two separate life insurance policies, and they may have less strict underwriting criteria – especially if one of the individuals is in very good health.
No Medical Exam
As its name implies, No Medical Exam Life Insurance coverage will not require that an applicant undergo a medical examination as a part of the underwriting process. In many cases, when applying for life insurance, individuals must meet with a paramedical professional who will ask them in-depth health questions and will also take from them blood and urine samples. Because of this, those who have certain types of adverse health conditions may be denied for the life insurance that they need. But, with no medical exam coverage, they could be approved for the coverage that they need – and, because there are no medical underwriting requirements to contend with, these policies are often approved within just a day or two after application.
While no medical exam life insurance is the best option for some, we recommend if you feel passing a typical life insurance medical exam is possible, that you try one of the above options before choosing this type of life insurance. This will ensure you are getting the best bang for your buck, and possibly help achieve lower premium rates.
We at Healthcare American would like to help you decide what type of life insurance policy is best for your individual situation. Please give us a call, and let us help you understand what is available, and assist you in purchasing the right plan for you and your loved ones.