- Qualities of permanent (cash value) life insurance
- July 3, 2013
Permanent life insurance refers to any cash value of insurance that provides continuous coverage to age 95 or 100.
This type of policy has a level premium that must be paid to keep the coverage in force, which is generally higher than the premium for term life. Under some circumstance, premium payments may be reduced or stopped, but this cannot be counted upon.
Typically, permanent policies will accumulate a cash value, which is tax deferred. Most permanent policies allow you to borrow against the policy value or withdrawal all or a portion of the cash value.
Premiums are higher than you would pay for the same face amount of term insurance, but they are less than the cumulative premiums you would eventually pay, if you were to keep renewing a term policy.
This is because interest earned on the cash value helps to offset the higher cost of pure life insurance protection, as the insured person grows older.
Some policies (e.g., universal life) allow you to vary your premium payments every year and even skip a payment, if you wish. The premium you pay (less expense charges deducted) goes into an accumulation account that earns interest.
Mortality (insurance) charges are deducted from the account. Insurance coverage continues as long as there is enough money in the account to pay the insurance charges.
The cash value of many life insurance policies may be affected by an insurance company’s actual experience over time.
For example, mortality expense charges are based on actuarial assumptions that may require periodic adjustment as national mortality experience gradually changes.
Likewise, expense charges are affected by such factors as how efficiently the company operates, economies of scale, overall company expenses, and so forth. Policy loans will also affect the long-term performance of a policy.
About Tony Steuer
Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.