Permanent life insurance
Encyclopedia
Permanent life insurance is a form of life insurance
such as whole life or endowment
, where the policy
is for the life of the insured, the payout is assured at the end of the policy (assuming the policy is kept current) and the policy accrues cash value
.
This is compared with Term life insurance
where insurance is purchased for a specified period (typically a year, or for level periods such as 5, 10, 15, 20 even 25 and 30 years) where a death benefit is only paid to the beneficiary
if the insured dies during the specified period.
Permanent life insurance originally was offered as a fixed premium fixed return product known as whole life insurance
also known as cash surrender life insurance. This offered consumers guaranteed cash value accumulation and a consistent premium. Consumers later wanted more flexibility which was offered in the form of universal life insurance
. Universal life insurance allows consumers flexibility in when premiums are to be paid and the amount that they would be. Universal life policies also allowed consumers to permanently withdraw cash from the policy without the interest associated with the loan provisions in whole life policies. Universal life policies retained the fixed investment performance of whole life policies. Variable life insurance follows the mold of whole or universal life, but it shifts the investment risk to the consumer along with the potential for greater returns. Variable universal life insurance
combines this with the flexibility in premium structure of universal life to create the most free form option for consumers to manage their own money (at their own risk). Variable universal life insurance policies are considered more favorable to other permanent life insurance alternatives due to the favorable tax treatment of all permanent life insurance policies and their potential for greater returns than other permanent life insurance products.
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
such as whole life or endowment
Endowment policy
An endowment policy is a life insurance contract designed to pay a lump sum after a specified term or on death. Typical maturities are ten, fifteen or twenty years up to a certain age limit...
, where the policy
Policy
A policy is typically described as a principle or rule to guide decisions and achieve rational outcome. The term is not normally used to denote what is actually done, this is normally referred to as either procedure or protocol...
is for the life of the insured, the payout is assured at the end of the policy (assuming the policy is kept current) and the policy accrues cash value
Cash value
The cash value of an insurance contract, also called the cash surrender value or surrender value, is the cash amount offered to the policyowner by the issuing life carrier upon cancellation of the contract...
.
This is compared with Term life insurance
Term life insurance
Term life insurance or term assurance is life insurance which provides coverage at a fixed rate of payments for a limited period of time, the relevant term. After that period expires coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or...
where insurance is purchased for a specified period (typically a year, or for level periods such as 5, 10, 15, 20 even 25 and 30 years) where a death benefit is only paid to the beneficiary
Beneficiary
A beneficiary in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example: The beneficiary of a life insurance policy, is the person who receives the payment of the amount of insurance after the death of the insured...
if the insured dies during the specified period.
Permanent life insurance originally was offered as a fixed premium fixed return product known as whole life insurance
Whole life insurance
Whole Life Insurance, or Whole of Life Assurance , is a life insurance policy that remains in force for the insured's whole life and requires premiums to be paid every year into the policy.-History:...
also known as cash surrender life insurance. This offered consumers guaranteed cash value accumulation and a consistent premium. Consumers later wanted more flexibility which was offered in the form of universal life insurance
Universal life insurance
Universal life insurance is a type of permanent life insurance based on a cash value. That is, the policy is established with the insurer where premium payments above the cost of insurance are credited to the cash value of the policy...
. Universal life insurance allows consumers flexibility in when premiums are to be paid and the amount that they would be. Universal life policies also allowed consumers to permanently withdraw cash from the policy without the interest associated with the loan provisions in whole life policies. Universal life policies retained the fixed investment performance of whole life policies. Variable life insurance follows the mold of whole or universal life, but it shifts the investment risk to the consumer along with the potential for greater returns. Variable universal life insurance
Variable universal life insurance
Variable Universal Life Insurance is a type of life insurance that builds a cash value. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner...
combines this with the flexibility in premium structure of universal life to create the most free form option for consumers to manage their own money (at their own risk). Variable universal life insurance policies are considered more favorable to other permanent life insurance alternatives due to the favorable tax treatment of all permanent life insurance policies and their potential for greater returns than other permanent life insurance products.
Payout likelihood
Because a permanent life insurance program is designed to be permanent and pay a death benefit, the cost of insurance is considerably higher than term insurance. Term insurance is referred to as pure death benefit with no cash accumulation vehicle tied to it. Because of this, permanent premiums remain 8 to 10 times more expensive than term premiums for the same coverage. Most people are drawn to term insurance for the low cost and the ability to invest the difference in separate financial products. Doing so has a potential drawback in some cases because all term policies eventually expire and the client would then have to pay a higher premium based on his attained age or he may not be able to qualify for a new policy at that point. In these situations, money earned from investments may not measure up to the coverage the policy would have provided.See also
- Life insuranceLife insuranceLife insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
- Theory of Decreasing ResponsibilityTheory of Decreasing ResponsibilityThe Theory of Decreasing Responsibility is a life insurance philosophy promoted by proponents of term life insurance . The theory assumes that the financial responsibilities of the insured are temporary and insurance should be purchased to offset those responsibilities...
- Term life insuranceTerm life insuranceTerm life insurance or term assurance is life insurance which provides coverage at a fixed rate of payments for a limited period of time, the relevant term. After that period expires coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or...
- Whole life insuranceWhole life insuranceWhole Life Insurance, or Whole of Life Assurance , is a life insurance policy that remains in force for the insured's whole life and requires premiums to be paid every year into the policy.-History:...
- Universal life insuranceUniversal life insuranceUniversal life insurance is a type of permanent life insurance based on a cash value. That is, the policy is established with the insurer where premium payments above the cost of insurance are credited to the cash value of the policy...
- Variable universal life insuranceVariable universal life insuranceVariable Universal Life Insurance is a type of life insurance that builds a cash value. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner...