Thinking about death is hard — preparing for it can be even harder. But purchasing permanent life insurance may help ensure that you are well prepared and your loved ones are well protected after you pass. This informational guide on types of permanent life insurance can help you consider all options as you start preplanning.
Permanent life insurance, often called whole life insurance, refers to any insurance plan that remains active for the duration of your life and provides a death benefit to loved ones after your passing. Most permanent life insurance plans also accumulate cash value over time and allow policyholders to take loans out of the accumulated cash — although failure to pay back the loans typically results in a deduction from the death benefit.
Permanent life insurance differs from term life insurance, also known as pure life insurance, which only pays death benefits to beneficiaries if a death occurs during a specified period of time. This period typically ranges from 1 to 30 years, depending on the policy. Because term life insurance is temporary, you have the option to renew it, terminate it, or convert it to a permanent coverage policy if you are still living when the period expires.
In this form of permanent life insurance, both your death benefit and the premium you pay will remain the same throughout the duration of the policy. According to the Insurance Information Institute, insurance companies are able to keep the premium level by charging a higher amount than what’s needed to pay claims in the early years of the policy. They invest the money and use it to supplement the premium to help pay the cost of life insurance for older people.
“By law, when these ‘overpayments’ reach a certain amount, they must be available to the policyholder as a cash value if he or she decides not to continue with the original plan,” the Insurance Information Institute says. “The cash value is an alternative, not an additional, benefit under the policy. In the 1970s and 1980s, life insurance companies introduced two variations on the traditional whole life product — universal life insurance and variable universal life insurance.”
A portion of the premium you pay on universal life insurance is put toward cash savings, while the remainder is put toward the death benefit. This cash savings account will accumulate interest over time, tax-deferred. The cash component allows you to temporarily stop paying premiums in an emergency as long as the cash value can cover the cost of the insurance. You can usually take tax-free loans against the cash value and sometimes adjust the death benefit over time.
Like universal life insurance, variable universal life insurance includes a cash savings component, but you have the option to invest some of it. This gives you more control and potentially higher returns. The final earnings can be allocated either toward your premiums or death benefits.
If you make wise investment decisions, you can take advantage of significant tax-deferred earnings, but if you choose riskier methods and the market turns south, the significant drop in account value could force you to pay additional premiums just to keep your policy active.
Preneed Funeral insurance, also known as burial insurance, is a type of permanent life insurance that only covers your funeral expenses. It’s purchased through a funeral home, which becomes your insurance beneficiary. You attend a preplanning appointment with your funeral home director, where you choose every element you want included in your funeral service. The funeral home director totals the costs, and that amount is the basis for your Preneed Funeral insurance plan. It also holds that rate for the cost of your funeral, regardless of inflation. Upon your death, the funds are given to the funeral home to pay for your funeral, and your family is not required to pay anything extra.
Wellabe provides Preneed Funeral insurance not only to help you make your final wishes clear, but also to leave no expenses behind for your loved ones. Call 800-995-9010 or visit our regional managers page to connect with a funeral home partner near you.
Photo credit: iStock
Wellabe offers life and supplemental health insurance plans to help you prepare for good days and bad. We’ll always be here to empower you to be well — well prepared, well protected, and well loved.
