The word "Permanent" when talking about Life Insurance is sort of a catch all phrase when referring to Life Insurance coverage that is designed to last forever.
There are two basic types of permanent Life Insurance we will discuss below. There are sub-categories as well, but really only two main forms of permanent coverage.
Whole Life Insurance
You may have heard of this term before. This is the oldest and truest form of permamant life insurance. When Life Insurance was created over 200 years ago, this was the only type of coverage available.
[Actually, the first life insurance company started in 1706! Seventy years before the U.S. gained independence. Pretty Crazy.]
It was, and still is, designed to stay in-force forever. So unlike Term Insurance, there is no end date. The premium payments are locked in forever at your current age. They're guaranteed to never increase.
This is a pretty valuable policy to own because if there is one certainty about life, it's that it will end. The only unknown is WHEN. Whole Life Insurance takes out the risk of outliving your policy, since it will remain in tact for as long as you pay the premiums or until you pass away.
Often times, you will not have to pay the premiums forever, yet still keep the policy in-force. Most whole life policies have what's called a Cash Value, which is bascially the equivalent of having equity in your home. The cash value is guaranteed to grow at a predetermined rate and is typically eligible for dividends. The dividends can get so large that you can opt to use the dividends to pay the premiums.
You can access the cash value at anytime through various methods. Because of IRS tax rules, when structured properly (which we can help you with), you also do not have to pay taxes when you take the money out.
So yo have Tax-deffered growth (like your 401k), Tax-free income (Not like your 401k), and liquidity (also not like your 401k).
Sometimes Whole Life Insurance can get attacked by the likes of Dave Ramsey or Suzie Orman who boast you can get double digit stock market returns consistently, thereby making Whole Life a bad option. But it shouldn't be compared to the stock market since you cannot lose money. As mentioned above, you have a guranteed cash growth.
Even though it may only return an average of 3-5%, it's completely safe. So the better comparison would be to the rate you receive at your bank. What does a bank give in interest these days? 0.01% maybe? Perhaps up to 1% if you put 500k into a 5 year CD. That doesn't even cover inflation.
In summary, Whole Life Insurance will be more expensive than term insurance, but it's the difference between renting a home vs. buying a home. Most people will agree that buying a home is the more cost effective way to live in the long-term.
Initially, it's more expensive, but the longer you own the home, the more equity you have. It's the same thing with Whole Life Insurance. More expensive, but way more benefits. Many people like to do a combination. So don't feel like you have to choose. If you need $1 million in coverage, we can work with your budget to find the right mix. Maybe it's 750k in term and 250k in whole life. Whatever it is, we can tailor fit it specifically for you.
Universal Life Insurance
Universal Life Insurance is the other type permanent coverage. It too, is designed to last forever. However it comes with a little more flexibility than Whole Life.
At the same time, it also comes with less guarantees (I'll explain in a minute). You can choose how much you want to pay for the coverage (within reason). There is no set required premium. There will be a minimum premium and a maximum premium for each coverage amount you select, and you can choose to pay anywhere in between.
You can also adjust the premium accordingly. If you get into a financial bind, you can opt to pay the minimum premium. Or if there is some cash value accumulated, you can have the cash value pay the premiums as well.
Now, the cash value is where you lose the guarantees. The growth of the cash value is determined by current interest rates, not the financial strength of the company. So when rates are high, you earn more. When they're down, you earn less. Most people buy this type of coverage as a more affordable option than Whole Life, coupled with the flexible premium payments. Not necessarily the fast cash growth. We can discuss with you by phone which plan is best for you.
Index Universal Life (IUL)
IUL is a sub category or Universal Life. It has all of the features mentioned above except the cash value mirrors the performance of a stock index (ie. S&P 500). So you have potential to earn more than in regular Universal Life or in traditional Whole Life.
Typically, they will put a cap on how much you can be credited. So for instance, if the stock index returns 15% in one year, you may only be credited 12%. The difference is retained by the insurance company.
Why do they keep the difference, you ask? Because another neat feature with IUL is that you will also have a floor for the crediting rate. So if the stock index does (minus)-18% one year, you will be credited 0% instead of the negative. Pretty cool, huh?
So the difference between what the index does and the cap rate is used to offset the risk to the insurance company so they give you that 0% floor during down years.
In other words, you can get the upside potential of the market without any of the downside.
We can help you with the design as well. All of our consultations are free. You can text us as well to setup a phone appointment.
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