Coverage without end: Types of permanent life insurance

Amy Higgins

Term life insurance requires you to make a bet. You choose a term (20 years, for example) and pay your premiums. If you die during the term, your beneficiaries get the payout. If not, the policy expires.

Permanent life insurance (also known as whole life insurance), on the other hand, provides a sense of security as it is good for your entire life, as long as you pay your premiums. It is more expensive than term life insurance, but it has a savings feature called a cash value account that increases over time and that you can withdraw from. When you die, your beneficiaries get the payout plus whatever savings your policy has accrued.

There are many variations on the permanent life insurance model. Choosing the one that best fits your needs can be tricky.

Traditional whole life

If you choose a traditional whole life insurance policy, your premium will remain the same throughout your life. The death benefit remains the same, but the account’s savings increase throughout your lifetime.

In your early years, premiums for a traditional whole life policy are significantly higher than what you would pay for a term life policy. However, they are less than what you would eventually pay if you were to continue renewing a term life insurance policy in your later years, according to the National Association of Insurance Commissioners (NAIC).

Universal life

Universal life insurance is more flexible than traditional whole life. Your premium payments go into an account that earns a money-market rate of interest, according to the Insurance Information Institute. As that money grows and you get older, you can use it to pay part of your premium.

This type of life insurance requires a greater level of personal responsibility than traditional whole life does. Your insurance provider will deduct maintenance charges from your account, and you also need to pay premiums. So, if the premiums you pay in that year plus the interest earned in the account are less than the charges, the value of the account drops, according to the NAIC. If the money in the account runs out, your coverage could end. To keep the account active, you would then have to step up your premiums or lower your death benefits.

Variable life

Like other types of permanent life insurance, variable life offers a death benefit and an investment opportunity. Your premiums are invested in stocks, bonds and money market mutual funds, which can augment the policy’s value or deplete it altogether, depending on how your investments perform, according to the Insurance Information Institute.

If your investments do well, your savings and death benefit will increase. If they don’t, the opposite happens. If you’re worried about losing your death benefit, ask for a guaranteed death benefit. You will pay more in premiums for this option, but it can provide peace of mind in the knowledge that your beneficiaries will be taken care of when you’re gone.

Universal variable life

Universal variable life insurance combines the flexibility of universal coverage with the investment options of variable coverage. You can adjust your premium payments and death benefit while making investments along the way. However, with universal variable life insurance, you assume the risks, Nationwide warns. And you must take into account the fees and expenses associated with this type of policy.

Making your pick

As long as your premium payments are in check, a permanent policy can provide lifetime coverage, so you don’t need to worry about proving your insurability down the road. Those who lean on the safer side might pick traditional whole life policy. But if a little risk doesn’t put you in a panic, buying permanent life insurance with more flexible investment options just might pay off.