Permanent life insurance provides protection throughout a person’s lifetime, provided that premiums are paid. It also builds cash value, which can be borrowed against or used to make premium payments. Term life, on the other hand, provides protection for a certain number of years and builds no cash value. Insurance experts recommend most people carry permanent life insurance and add term life when they need more protection for a certain time period. Here are some of the pros and cons of permanent life insurance.
As John Barnes explains in The State Journal, with life expectancies in America rising, permanent life insurance plays a more important role in financial planning. It remains enforced regardless of changes in a person’s health status. In retirement, people’s expenses are tending to remain higher than in previous generations, creating more need for survivors’ protection. Whole life can also fill a hole in survivors’ budgets, such as when pension benefits are cut upon the insured’s death.
Appreciation and tax savings
It’s also important to note that whole life insurance grows over time. As premiums are paid, cash value accrues, which increases the death benefit and provides a savings nest egg. The cash value can be accessed at any time and used for any purpose. Some policies pay dividends, which add to the cash value. The policyholder can also use the dividends for premium payments.
On average, income taxes take 1/3 of Americans’ earnings. Life insurance proceeds from the death benefit or policy loans come unencumbered by a bill from Uncle Sam. Few other investments offer that level of savings and must work harder to make up for the tax bite.
Not surprisingly, with all the benefits permanent life insurance provides, its cost can be formidable. Compared to term life, premiums for universal life average 6 times more, and whole life averages 10 times more. Universal life provides flexible premiums, while whole life provides level premiums.
Many households find themselves unable to afford the amount of permanent insurance they need, especially if they have young children. To remedy this, they can consult with their insurance agents about permanent life insurance with a term rider. This provides additional term insurance for a certain number of years. Another option is a term policy that offers the right to convert part of the policy to whole life.
Permanent life insurance provides essential coverage for any household. Financial planners always recommend permanent coverage. If more coverage is needed for a time, term life insurance can fill the gap.