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Permanent Life Insurance Grows Cash Value, Has Many Options

Comparing Term Vs Whole Life Insurance And Universal Life Insurance

By Mike Heuer

Permanent life insurance is another name for whole life insurance and earned the name due to the fact it is in force for an entire lifetime any provides a guaranteed payout so long as all premiums have been paid and the policy matures. Most people in the United States buy whole life insurance plans, which grow cash value over the life of the contract while paying a death benefit when the named insured dies or turns age 100, which is considered to be a lifetime by insurers. About 70 percent of all life insurance policies sold in the United States are whole life plans, according to the Insurance Information Institute.

Permanent life insurance generally is used to create a financial legacy and build retirement income for married couples and others. By contrast, a term life insurance plan is in effect for a set number of years, usually between 10 years and 30 years, and then it expires if the named insured is still alive. Premiums for term life plans are level and do not change throughout the period of time the contracts are in place. But premiums for permanent life can rise over time if the need to growing cash value also rises.

Another significant difference between term life insurance vs whole life insurance is the fact term life insurance plans to not require a medical exam to purchase. Studies show as few as 1 percent of term life insurance plans result in a death benefit being paid, and insurers base premiums on the age, general health, use of tobacco products and mortality tables, which tell insurers the chances someone might die during the period of time for which a term life insurance plan is in effect.

Another type of permanent life is called universal life insurance. The variation of whole life insurance policies provide a death benefit when the named insured dies. But the cash values have to be maintained to prevent the policy from lapsing if the investments do not grow and instead wind up losing money. When investments are doing well, premium amounts can be lowered for a period of time. But if too much money has been withdrawn, larger premiums must be paid to keep the policy in force and avoid possible insolvency.

One of the most flexible types of life insurance sold it the variable universal life insurance plans that enable policyholders to choose among several investment options and make flexible premium payments based on the cash value accumulated over the years. Variable universal life insurance policies are a version of whole life but with greater growth potential. Proper investing can result in returns of more than 7 percent over the life of the contract

Because of the investment options, the U.S. Securities and Exchange Commission has some authority over the insurance plans. By law, such plans only can be sold by insurance producers who have passed their respective state life insurance examinations and are fully approved for selling the life products with investment potential.

A big advantage of many universal life plans is the tax advantage they have over standard investments due to the fact they are insurance policies, so there is no federal income tax applied to benefits paid out and in most cases no state income taxes, either. The likely tax-free component makes it possible to give annual cash benefits to children for investment in their own vehicles, such as annuities or their own variable universal life plans. That enables them to take out loans against the cash value to help pay for their tuition, vehicles, make a down payment on a home and other purposes without facing a tax penalty.