How Permanent Life Insurance Works
Life insurance ensures that when you die your family is not burdened by your debts. The life insurance company pays a death benefit to your family if all premiums were paid during your lifetime. One type of life insurance you might consider for long-term insurance protection is permanent life insurance.
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Types
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There are several types of life insurance policies available to you. Whole life is the most basic. Whole life insurance raises the cost of insurance over pure term life insurance and extends coverage to age 100. To be able to pay the promised benefits at that age, a cash reserve must be established. This reserve holds down the future cost of insurance by replacing the death benefit with the reserve. This reserve is called the cash value and is a savings that you may use for any purpose during your lifetime.
Another type of policy available to you is a modified version of whole life called variable life. Variable life insurance allows you to invest your premium dollars into mutual funds. These mutual funds determine the value of the policy over time.
Finally, you may invest in universal life insurance. Universal life insurance is a combination of term life insurance and a cash value savings component. The cost of insurance is deducted from the cash value and then the cash value is credited with interest either through a fixed interest investment, mutual funds or embedded derivative contracts managed by the insurance company.
Function
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All permanent life insurance attempts to extend death benefit protection so that it will last for your entire life. Some policies, like whole life, guarantee this death benefit. Other policies, like variable and universal life, do not make guarantees. Instead, they make projections and assumptions based on the interest crediting method of the policy.
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Benefit
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The benefit of permanent life insurance is that all permanent life insurance policies use both a cash value account and a death benefit function. Many, but not all, policies allow you to take advantage of the cash value so that the cash value can eventually be used to reduce or eliminate the out of pocket costs for the insurance. If this happens, then your policy may be "self-sustaining."
Disadvantage
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The disadvantage to permanent life insurance is the upfront cost. Premiums for the policy may be five to 10 times the cost of term life insurance. Cash values also take a long time to build up. You are unlikely to have your cash value equal your total premiums paid until the tenth year of the policy.
Considerations
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When considering permanent life insurance, you must take a long-term view. Your policy will initially cost you a lot of money in most cases. However, over the long-term, your policy premiums may become lower or they may disappear altogether. While this is not guaranteed to happen, it is a feature of many permanent policies.
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