Permanent Life Insurance: The Basics

Learn the pros and cons of different types of permanent life insurance.

Permanent life insurance comes in many shapes and sizes. Before you sign up for a policy, you should look into which is right for your situation. Here's a quick guide to universal life insurance, whole life insurance, variable life insurance, and more.

If you are not sure whether permanent insurance is what you're looking for, see Life Insurance Options.

Whole Life Insurance

Whole life (sometimes called "straight life") insurance provides a set dollar amount of coverage that can never be canceled in exchange for fixed, uniform payments. Because the payments are the same throughout your life, the premiums are higher compared to your statistical risk of death in the early years of the policy. This is why reserves are built up. Assuming you live a long while after the policy was issued, your payments become lower -- compared to your risk of death. In other words, during the first few years of a whole life policy, insurance companies take in substantially more money than they pay out.

Some of the surplus goes to pay the insurance agent's commission. Some of it becomes your cash reserve, which the company puts in fixed-income investments. After a set time, usually several years, you have the right to borrow against the cash reserve. You can also, of course, cancel the policy and receive its cash surrender value.

Whole life is generally undesirable for younger people with small children who can't afford the high premiums during the early years of the policy.

Universal Life Insurance

Universal life combines some of the desirable features of both term and whole life insurance, and offers other advantages, including:

  • Over time, the net cost is lower than whole life insurance.
  • You build up a cash reserve, as with whole life.
  • You can vary the premium payments, amount of coverage, or both, from year to year. In contrast, whole life requires one set payment amount, which cannot be varied, for the life of the policy.

More information. In addition, universal life policies normally provide you with more consumer information. For example, you are told how much of your premium goes toward company overhead expenses, reserves and policy proceed payments, and how much is retained for your savings. This information isn't usually provided with whole life policies.

There can be other significant advantages to universal life; an insurance agent will be glad to explain them to you.

Variable Life Insurance

Variable life insurance refers to policies in which cash reserves are invested in securities, stocks, and bonds. In a sense, these policies combine an insurance feature with a mutual fund. That means your investment return is tied to the financial markets' performance.

Variable Universal Life Insurance

Variable universal life insurance is a type of whole life insurance that combines the premium payment and coverage flexibility of universal life insurance with the investment opportunity (and risk) of variable life insurance.

Single-Premium Life Insurance

With single-premium life insurance, you pay, up-front, all premiums due for the full duration of the policy. Normally, any policy with a savings feature can be purchased with a single premium. Obviously, this requires a large chunk of cash -- $5,000, $10,000 or often much more, depending on your age and the dollar amount of the policy.

Estate tax savings. One reason to commit so much cash to buying an insurance policy is that it enables you to give the fully-paid-for policy to new owners, which can result in major estate tax savings. (For more information, see Transfer Your Life Insurance and Decrease Your Estate Tax .) Because there are no more payments to make, a gift of a single-premium policy doesn't involve the risk that the new owners will fail to make payments and cause the policy to be canceled.

Survivorship Life Insurance

Survivorship life insurance (also called "second to die," or "joint," insurance) is a relatively new type of insurance. It provides a single policy that insures two lives, usually spouses. When the first spouse dies, no proceeds are paid. Instead, the policy remains in force and the surviving spouse must continue to pay premiums. The policy pays off only upon the death of the second spouse.

Why would any couple want such a policy?

Estate planning. Wealthier couples who expect that substantial estate taxes will be assessed on the death of the second spouse may use survivorship life insurance as part of estate planning. (For an overview of whether an estate will be subject to federal taxes, see Estate and Gift Tax FAQ.) None of this is of interest to people with small- or moderate-sized estates.

Family business or real estate. This type of insurance may also be desirable when a major family asset is a valuable family business, or real estate interests -- assets that aren't liquid, and that the survivors may not want to sell. Or suppose two children inherit a family business, but one doesn't want to keep it going. The other could use her share of the insurance proceeds as an initial buy-out payment, so she could retain ownership of the business.

Health issues making other life insurance expensive. Finally, this kind of insurance may be desirable if one member of a couple is in less than good health, making other types of insurance extremely expensive. Because two lives are insured, premiums for survivorship life policies are relatively low compared to policies on one person's life. Therefore, if the other spouse is in reasonably good health, the couple can usually obtain survivorship life insurance.

If you are ready to buy life insurance or plan your estate, read Plan Your Estate by Denis Clifford (Nolo), a comprehensive guide to all the significant estate-planning options available.

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