Permanent Life Insurance is exactly how it sounds – coverage for your lifetime. With permanent Insurance you gain peace of mind that your premiums will never increase and should you pass away, your beneficiaries are guaranteed to receive a tax free benefit.
The purpose of permanent life insurance is to ensure your beneficiaries maintain their quality of life, cover outstanding debt, such as a mortgage, and pay for unexpected expenses, such as capital gains on any assets that you leave behind. Some permanent life insurance policies can build cash value, which you can borrow against or withdraw for future needs. The two forms of permanent insurance are below: Whole Life Insurance and Universal Life Insurance.
Whole Life Insurance
There is a common saying in the insurance world, “Term Insurance is for IF you die, Permanent Life Insurance is for WHEN you die”.
Rather than covering only a specified term, Whole Life Insurance is a form of permanent insurance that provides coverage for a lifetime. The cost of the coverage is spread out over the lifetime of the policy or can be paid-up early – within 10, 15 or 20 years. This option provides a “pay now, save later” approach.
Whole Life Insurance is great for those who would like lifetime protection and are willing to spend more than the cost of Term Insurance. A Whole Life policy provides a very steady and defined life insurance solution:
- Premium amount is guaranteed
- Death benefit amount is guaranteed
- Interest rate in which the cash value accrues is guaranteed.
How does a Whole Life Insurance policy work?
A Whole Life Insurance policy is comprised of two components:
- Face Value: This is the insurance component of the policy that your beneficiaries will receive upon your death. A portion of your monthly premiums go towards funding your face value.
- Cash Value: This is the savings component of the policy that you can access in the future. A portion of your monthly premiums are invested by your insurance company.
- Policyholder can use the cash value as a tax-sheltered investment. Interest and earnings on the policy are not taxable.
- Once you have accumulated savings in your cash value, you have the ability to take a policy loan by borrowing against your cash value.
- Cash value can be passed on to your beneficiaries tax-free
There are two types of Whole Life policies: participating and non-participating. Both provide level premiums, lifetime protection and a guaranteed cash value, but participating Whole Life plans pay an annual dividend. The annual dividend is NOT guaranteed, and in most instances is linked to long-term interest rates as well as the insurance company’s performance.
To learn more about Whole Life Insurance, contact us today!
Universal Life Insurance
Unlike the steady nature of a Whole Life policy, a Universal Life policy offers the benefit of having a flexible investment portfolio. The investment options are tailored to your financial needs and risk tolerance. Similar to Whole Life Insurance, Universal Life Insurance and has both a conventional term policy along with cash values and investments.
Universal Life Insurance is best suited for individuals who:
- Are looking for permanent life insurance
- Have financial security and would like to grow their assets
- Have maxed out their allowable RSP contribution
- Are looking for tax-sheltered returns for non-registered assets
- Are close to retirement and want to preserve their estate
- The cash value under a Universal Life policy is tied to shorter-term interest rates versus that of a Whole Life policy
- The rate of returns have the potential to be greater under a Universal Life Insurance policy than that of a Whole Life policy
- There are greater risks involved when you combine your policy with investments
- Under a Universal Life policy the cash value can build up very quickly
- A minimum face value is required under the policy
To learn more about Universal Life Insurance, contact us today!