3.4 Whole Life (Permanent) Insurance
As anyone can guess by its name, permanent life insurance offers coverage for the insured's entire lifetime. Under a permanent life insurance policy, coverage will never expire and will never need to be renewed (assuming the premiums are paid on time). Once known only as permanent life insurance, these policies are now more often called cash value insurance policies, referring to the additional built-in savings feature that steadily increases the value of the policy. Not only do whole life policies build cash value, they also mature at age 100 at which time benefits are mandated to be paid. That's why the combination of the cash value feature and the maturity date are called living benefits.
Benefits are available for the lifetime of the policyowner. Premiums on whole life policies are designed as if the insured will live until age 100. Usually a whole life policy will be cashed in for its surrender value or the face amount will be paid out as a death benefit prior to maturity since statistics show that most of us won't live to age 100.
The level premium approach is the term that describes how the premium payment structure is designed to allow the premiums to remain level throughout the insured's lifetime.
Permanent insurance can be broken down even further into six different types: (1) Straight whole life, (2) universal life, (3) variable life, (4) adjustable life, (5) modified life, and (6) family life.
Listed below are the most concerning advantages and disadvantages of permanent life insurance.
Advantages
- Protection is guaranteed for life and will not cancel because of age.
- Premium costs can be fixed or flexible.
- Cash value builds.
- Cash value can be used to pay the premiums.
- Additional insurance can be added without the need for medical examination or for furnishing evidence of insurability.
- The policy can be converted to an annuity.
- Loan values are available for borrowing against the principal policy.
Disadvantages
- The required premium levels may make it hard to buy enough protection.
- Whole life insurance could prove more costly than term insurance over the long run.
- Make sure the premiums are within the client's budget (permanent insurance provides protection for the client's entire life).
- Make sure the client can commit to these premiums over the long term (if the insured doesn't plan to keep the policy for many years, another type of policy should be considered).
- Make sure the client knows how much money will be available if the policy is surrendered (cashing in a permanent policy after a short time can be very costly).
Essentially, unless the policyowner can afford permanent life insurance and is committed to paying the premiums until the insured's death, term life insurance might be a wiser choice than a permanent life insurance policy.
Familiarize yourself with the tables below and you will be in good shape to answer any questions on this subject that may come up in the exam.
Remember: The shorter the premium-paying period, the higher the premium cost.
