Types of Permanent Life Insurance Policies
Permanent life insurance policies are financial contracts between you and a life insurance company. Various types of policies exist to make sure that you buy the coverage that you want. However, before you purchase one, make sure that you understand the various types of life insurance policies on the market.
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Types
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There are several major types of permanent life insurance policies that you can purchase. Whole life insurance is the most common. This type of life insurance allows you to pay level premiums, receive level or increasing death benefits and guaranteed cash values. Variable life insurance is a type of whole life insurance that does not offer guaranteed cash values. Instead, premiums are fixed and invested into mutual funds to enhance the cash value account. This account and the death benefit fluctuate with the underlying value of the mutual funds. Universal life insurance offers flexible premium payments and death benefits. Premiums can be invested in the insurance company's general account, mutual funds or assigned to an equity-linked index where the interest earned will be tied only to the upward movement of the stock market.
Benefits
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The benefit of a permanent life insurance policy is that it builds cash value savings that can be used for any purpose throughout your life. All of these policies also allow tax-free build up of cash values and tax-free access to withdraw them with no penalties from the IRS or the insurance company.
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Drawbacks
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Regular premium payments are not always required, as in the case of universal life insurance, but, if the cash value account ever drops to zero, the policy lapses and the insurance coverage terminates. In this case, you may be subject to substantial taxes on any amount of money that was in the policy beyond the premium payments that you made.
Misconceptions
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A common misconception is that permanent policies are more expensive than term life insurance. While the premium payments are higher, the actual cost of insurance is the same. If a term life insurance policy was structured so that the policy and premiums could be carried out to age 100, the cost of insurance would be the same. However, because of the investment component in the permanent policy, it would be the same or less expensive than the term life policy.
Considerations
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You should understand the risks inherent in permanent life insurance. Variable life and universal life insurance offer no explicit guarantees on cash values. You must be willing to manage the policy over time to make sure that you maximize the value. Whole life, while offering guaranteed cash values and death benefits, requires a lifetime commitment of premium payments from you.
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