Permanent life insurance is life insurance that cannot be cancelled for any reason except fraud, so long as the owner regularly pays his premiums. Any such cancellation must occur within a period of time, which usually is two years, defined by law. The four basic types of permanent insurance are whole life, universal life, limited pay, and endowment.
Whole life coverage
Whole life insurance provides lifetime
death benefit coverage for a level premium. For younger people, whole
life premiums are much higher than term insurance premiums, but because
term insurance premiums rise with increasing age of the insured, the
cumulative value of all premiums paid under whole and term policies are
roughly equal if policies are maintained to average life expectancy.
Part of the insurance contract stipulates that the policyholder is
entitled to a cash value reserve that is part of the policy and
guaranteed by the company. This cash value can be accessed at any time
through policy loans that are received income tax-free and paid back
according to mutually agreed-upon schedules. These policy loans are
available until the insured’s death. If any loans amounts are
outstanding—i.e., not yet paid back—upon the insured’s death, the
insurer subtracts those amounts from the policy’s face value/death
benefit and pays the remainder to the policy’s beneficiary.
While some life insurance companies
market whole life as a “death benefit with a savings account”, the
distinction is artificial, according to life insurance actuaries Albert
E. Easton and Timothy F. Harris. The net amount at risk is the amount
the insurer must pay to the beneficiary should the insured die before
the policy has accumulated premiums equal to the death benefit. It is
the difference between the policy’s current cash value (i.e., total paid
in by owner plus that amount’s interest earnings) and its face
value/death benefit. Although the actual cash value may be different
from the death benefit, in practice the policy is identified by its
original face value/death benefit.
The advantages of whole life insurance
are its guaranteed death benefits; guaranteed cash values; fixed,
predictable premiums; and mortality and expense charges that do not
reduce the policy’s cash value. The disadvantages of whole life are the
inflexibility of its premiums and the fact that the internal rate of
return of the policy may not be competitive with other savings and
investment alternatives.
Death benefit amounts of whole life
policies can also be increased through accumulation and/or reinvestment
of policy dividends, though these dividends are not guaranteed and may
be higher or lower than earnings at existing interest rates over time.
According to internal documents from some life insurance companies, the
internal rate of return and dividend payment realized by the
policyholder is often a function of when the policyholder buys the
policy and how long that policy remains in force. Dividends paid on a
whole life policy can be utilized in many ways.
The life insurance manual defines policy
dividends as refunds of premium over-payments. They are therefore not
exactly like corporate stock dividends, which are payouts of net income
from total revenues.
Universal life coverage
Universal life insurance (UL) is a
relatively new insurance product, intended to combine permanent
insurance coverage with greater flexibility in premium payments, along
with the potential for greater growth of cash values. There are several
types of universal life insurance policies, including interest-
sensitive (also known as “traditional fixed universal life insurance”),
variable universal life (VUL), guaranteed death benefit,
andequity-indexed universal life insurance.
Universal life insurance policies have
cash values. Paid-in premiums increase their cash values; administrative
and other costs reduce their cash values.
Universal life insurance addresses the
perceived disadvantages of whole life – namely that premiums and death
benefits are fixed. With universal life, both the premiums and death
benefit are flexible. With the exception of guaranteed-death-benefit
universal life policies, universal life policies trade their greater
flexibility off for fewer guarantees.
“Flexible death benefit” means the
policy owner can choose to decrease the death benefit. The death benefit
can also be increased by the policy owner, usually requiring new
underwriting. Another feature of flexible death benefit is the ability
to choose option A or option B death benefits and to change those
options over the course of the life of the insured. Option A is often
referred to as a “level death benefit”; death benefits remain level for
the life of the insured, and premiums are lower than policies with
Option B death benefits, which pay the policy’s cash value—i.e., a face
amount plus earnings/interest. If the cash value grows over time, the
death benefits do too. If the cash value declines, the death benefit
also declines. Option B policies normally feature higher premiums than
option A policies.
Limited-pay
Another type of permanent insurance is
limited-pay life insurance, whose premiums are paid over a specified
period, commonly ten or twenty years, after which no additional premiums
are due. Benefits are sometimes paid out at the age of 65; other ages
can include 75, 85, and 100.
Other limited pay policies do not pay
out at a set age, but become “paid up”, leaving the policyholder with a
guaranteed death benefit and no further premiums to pay.
Endowments
Endowments are policies whose face
values equal a benefit amount at a given age, called the endowment age,
rather than a death benefit amount. Endowments require higher premiums
than whole life and universal life policies because premiums are paid
over shorter periods and maturation dates are earlier.
The US Technical Corrections Act of 1988
tightened the rules on tax shelters such as modified endowments. These
follow the same tax rules asannuities and IRAs.
Endowments mature and are paid out after
a prespecified period (e.g. 15 years) or at a prespecified age (e.g.,
65), whether the insured is alive or has already died.
Accidental death
Accidental death insurance is a type of
limited life insurance that is designed to cover the insured should they
die as the result of an accident. “Accidents” run the gamut from
abrasions to catastrophes but normally do not include deaths resulting
from non-accident-related health problems or suicide. Because they only
cover accidents, these policies are much less expensive than other life
insurance policies.
Such insurance can also be accidental
death and dismemberment insurance or AD&D. In an AD&D policy,
benefits are available not only for accidental death but also for the
loss of limbs or body functions such as sight and hearing.
Accidental death and AD&D policies
very rarely pay a benefit, either because the cause of death is not
covered by the policy or because death occurs well after the accident,
by which time the premiums have gone unpaid. To know what coverage they
have, insureds should always review their policies. Risky activities
such as parachuting, flying, professional sports, or military service
are often omitted from coverage.
Accidental death insurance can also
supplement standard life insurance as a rider. If a rider is purchased,
the policy generally pays double the face amount if the insured dies
from an accident. This was once called double indemnity insurance. In
some cases, triple indemnity coverage may be available.
