A permanent life insurance policy will remain in force until it matures. At maturity the policy is guaranteed to pay out. There are three main types of permanent life insurance; whole life; universal life; and variable life. They all provide full life cover to protect against the risk of death of the insured. They are designed to be a long term product and also act as an investment. Some policies have the added benefit of profits in the form of interest payments or dividends (this is called ‘with profits’). A permanent life policy is an assurance policy. That is, the policy provides protection against an event that is sure to happen. The policy holder or their beneficiaries will definitely receive a payout. This is a why premiums are much higher than for a term insurance.
Whole Life Insurance
A variety of whole life polices exist. It is the most prevalent form of permanent life insurance. Policies include; Ordinary Life and Limited Payment (Traditional Life); Interest Sensitive; and Single Premium. Whilst these policies each have individual qualities, they all offer the same basic features.
- Life assurance and investment product.
- Guaranteed death benefit/face value, which will be paid out if the insured dies during the term of the policy.
- Accumulation of a cash value. This increasing cash value reduces the risk to the insurer, so premiums may decrease over time.
- The policy holder can access this cash value at any time by withdrawing or borrowing it; or surrendering the policy.
- There is an option to pay back money borrowed from the cash value, therefore maintaining the face value of the policy.
- Can be ‘with’ or ‘without profits’. Can be unit-linked (Single Premium).
- Premiums are high (compared to term insurance). They remain fixed or decrease.
- Designed to mature when the insured reaches100 years of age. At this time the cash value should equal the face value and premiums cease. If living, the insured receives the face value. However, typically the insured will plan to withdraw funds from the cash value prior to maturation, for the purpose of funding retirement.
- A policy can not be cancelled by the insurer (except in the case of fraud).
- Rate of return may be lower than with other saving options.
- Tax shelter on returns.
- Extra features (sometimes called riders) can be added onto a policy. For example; accidental death; critical illness; waiver of premium; and/or joint life.
- The insurance provider essentially makes all the decisions regarding the policy. Management fee’s are high and are taken directly from the cash value.
- Subject to interest rate and inflation risk.
Universal and Variable Life Insurance
Universal and Variable life policies are similar to an ordinary whole life policy but they are more flexible. The death benefit and premiums can be altered to suit the policy holder. There are also more investment options available. Fees payable (for example, the mortality charge and administration) are often higher but additional tax advantages may be gained.
To conclude, the purchase of any whole life insurance policy is a commitment. The return on investment is not guaranteed. Furthermore, although it is possible to access the cash value at any stage, doing this early on in the term of the policy may be very costly. It is important to think carefully before deciding on a policy. It may be prudent to seek financial advice from a life insurance professional.
Christopher Robin is writing for http://www.protected.co.uk/ . To get a best life insurance quote and to compare life insurance please visit us.
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