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Permanent Life Insurance

Definition

Permanent Life Insurance is a type of life insurance policy that provides coverage for the entire lifetime of the policyholder. Unlike term life insurance, it does not expire after a specific period. Additionally, it typically includes a savings component, which can grow over time and potentially be borrowed against, known as cash value.

Phonetic

The phonetics of the keyword “Permanent Life Insurance” is: /ˈpɜːrmənənt laɪf ɪnˈʃʊrəns/.

Key Takeaways

  1. Lifetime Coverage: Unlike term life insurance, which covers the policyholder for a specific time period, permanent life insurance provides lifetime coverage. It does not expire as long as you continue to pay the premiums.
  2. Cash Value Buildup: As well as paying a death benefit, permanent life insurance policies also build up a cash value over time. This is a amount of money that the policyholder can borrow against or use during their lifetime, as they need.
  3. Higher Premiums: The premiums for permanent life insurance are typically more expensive than term life insurance due to the lifetime coverage and cash value feature. However, these premiums usually remain the same over the life of the policy.

Importance

Permanent Life Insurance is an important term in business/finance because it offers lifelong coverage and an investment component, which is a cash value. Unlike term life insurance, which covers the policyholder for a specific time period, permanent life insurance remains active for as long as premium payments are made. Its vital feature is the cash value component that grows over time and can be borrowed against or invested for potentially higher returns, providing a valuable financial resource. Thus, it serves a dual function of offering financial protection while also enabling wealth accumulation. This feature makes it a significant consideration for individuals seeking not only insurance coverage, but also long-term investment options.

Explanation

Permanent life insurance, as the name suggests, is designed to provide lifelong coverage unlike term life insurance which provides coverage for a certain period of time. The primary purpose of permanent life insurance is to offer a guaranteed death benefit that will be paid to your beneficiaries once you pass away. This serves as a financial safety net for your loved ones, allowing them peace of mind know that they will be financially taken care of in your absence. This type of life insurance is often used as an essential tool for legacy or estate planning, as it can help offset funeral expenses, taxes, or other debts that you might leave behind.

Apart from providing a death benefit, permanent life insurance also includes a cash value component that differentiates it from term life insurance. This cash value component essentially acts as a tax-favored savings account, which can accumulate wealth over time. This aspect of permanent life insurance is often used for various purposes like supplementing retirement income, helping in situations of financial hardship through loan provisions, or even funding important life milestones such as a child’s education or a down payment on a house. The multi-faceted utility of permanent life insurance thus makes it a versatile financial tool for both protection and investment.

Examples

1. Whole Life Insurance: This type of permanent life insurance is structured to provide coverage for the entire life of the policyholder. A portion of the premium paid goes into building cash value that can grow over time and can be borrowed against, or left as a legacy for beneficiaries. Example: A 30-year-old professional invests in a Whole Life Insurance policy. His premiums stay the same throughout his life, creating financial stability, and he builds cash value as he ages.

2. Universal Life Insurance: This is another form of permanent life insurance that provides more flexibility. It allows the policyholder to alter the premium amount and death benefits within certain limits. It also builds a savings element that grows on a tax-deferred basis. Example: A business owner might purchase a Universal Life Insurance policy to not only secure a death benefit for his family, but also to achieve certain business objectives like using the accrued cash value as collateral for a business loan.

3. Variable Life Insurance: This is a type of permanent life insurance policy with an investment component. The policy has a cash-value account, which is invested in a number of sub-accounts available within the policy. The value of the policy can fluctuate based on the performance of these investments. Example: A high-earning executive who is comfortable with investment risk might choose a Variable Life Insurance policy to potentially gain a higher return, while also providing a death benefit for her beneficiaries.

Frequently Asked Questions(FAQ)

What is Permanent Life Insurance?

Permanent Life Insurance is a type of life insurance policy that provides coverage for the entire lifetime of the insured. The policy does not expire as long as premiums are paid, and it also accumulates a cash value over time that can be borrowed against.

How does Permanent Life Insurance differ from Term Life Insurance?

Unlike term life insurance, which covers the policyholder for a specific period, permanent life insurance provides lifelong coverage. Additionally, a portion of the premium paid towards permanent life insurance goes into a cash value component which grows over time.

What are the types of Permanent Life Insurance?

There are three main types of permanent life insurance: Whole Life Insurance, Universal Life Insurance, and Variable Life Insurance. They all provide lifetime coverage, but differ in how cash value grows, flexibility of premiums, and the type of investment options used for the accumulation of cash value.

Does the premium for Permanent Life Insurance change over time?

Typically, the premium for Permanent Life Insurance remains the same throughout the life of the policy. However, for certain types like Universal Life Insurance, the premium might change based on changes in the insurance market and the policy’s cash value.

Can I withdraw the cash value of my Permanent Life Insurance policy?

Yes, most permanent life insurance policies allow you to withdraw or borrow against the cash value. However, this can potentially reduce the death benefit and may have tax implications.

Is Permanent Life Insurance a good investment?

This depends on your unique financial needs. Permanent life insurance can serve as both a death benefit safety net and an investment tool thanks to its cash value component. However, premiums are usually higher than term life insurance, and it may not be the best choice if you’re seeking the highest possible returns from a pure investment perspective.

Can I choose the beneficiary of my Permanent Life Insurance Policy?

Yes, you can name any individual, trust, or organization as your policy’s beneficiary. This entity or person will receive the death benefit upon your passing.

Related Finance Terms

  • Cash Value: A feature unique to permanent life insurance where a portion of the premium paid accumulates over time and can be borrowed against or withdrawn for various needs.
  • Death Benefit: The amount of money the beneficiaries receive upon the death of the insured. In permanent life insurance, this benefit is generally tax-free and guaranteed as long as the premiums are paid.
  • Policy Premium: The amount of money charged by the insurance company for the coverage. Premiums for permanent life insurance are typically higher than term insurance because they provide lifelong coverage and build cash value.
  • Dividend Option: Certain types of permanent life insurance may offer dividends. They can be used to decrease premiums, increase the cash value, or increase the death benefit.
  • Whole Life Insurance: A type of permanent life insurance that offers guaranteed death benefit, cash value growth and constant premiums over the life of the policy.

Sources for More Information

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