A permanent life insurance policy will provide the insured with a lump sum payment upon death. Unlike level term life insurance, there is no defined term when the policy will cease to pay out. No matter whether the policyholder passes away at 24 or 94, their estate or a nominated beneficiary receives payment. Coverage is often taken out for the purpose of tax avoidance and/or to ensure that a loved one receives a substantial sum of money when the insured is no longer with us.
How Permanent Life Insurance Works
The cost of a whole term life insurance policy increases with age so this needs to be factored-in by the provider. This is achieved by separating the premium into two parts. The first part of each premium is used to insure against the risk of mortality. Given that coverage is more affordable in the earlier years of the whole life policy (because the policyholder is younger and healthier), this leaves a sum of money that can be invested in bonds and equities. This money will be used to cover the rising cost of premiums and/or to pay out a lump sum when the insured dies.
Whole Term Life Insurance Premiums
Permanent life insurance provides a more expensive form of coverage than level term life insurance. This is because the policyholder is covered for the remainder of their life. Only an estimated 1% of level term policies will actually pay out. As already alluded to, the insurer not only needs to cover the cost of paying out a mortality benefit, it also needs to invest money to cover the huge expense of providing coverage further down-the-line. This means that it is normally sensible to use an inexpensive level term policy to protect the financial interests of young children and/or clear the mortgage in the event of death.
A Whole of Life Insurance to Avoid Taxation
It is possible to use permanent life insurance to 'move' money outside of the deceased's estate. This tactic is often recommended by financial advisors when their client has other property and investments that means that they would otherwise pay a large amount of inheritance tax. Although the premiums are expensive (particularly for those who are older), taking out a whole life policy and nominating a beneficiary outside the estate can reduce the amount of tax that will become payable upon death.
A Whole Life Policy Has a Cash-in Value
Due to the investment element, a permanent life insurance policy can be cashed-in. This can be helpful when the insured is in a tight spot financially and/or is unable to maintain the monthly premiums due to an unfortunate change of personal circumstances. However, a whole term life insurance policy shouldn't be considered to be an investment plan as the long term returns do not compare favorably with investing in equities.
How Permanent Life Insurance Works
The cost of a whole term life insurance policy increases with age so this needs to be factored-in by the provider. This is achieved by separating the premium into two parts. The first part of each premium is used to insure against the risk of mortality. Given that coverage is more affordable in the earlier years of the whole life policy (because the policyholder is younger and healthier), this leaves a sum of money that can be invested in bonds and equities. This money will be used to cover the rising cost of premiums and/or to pay out a lump sum when the insured dies.
Whole Term Life Insurance Premiums
Permanent life insurance provides a more expensive form of coverage than level term life insurance. This is because the policyholder is covered for the remainder of their life. Only an estimated 1% of level term policies will actually pay out. As already alluded to, the insurer not only needs to cover the cost of paying out a mortality benefit, it also needs to invest money to cover the huge expense of providing coverage further down-the-line. This means that it is normally sensible to use an inexpensive level term policy to protect the financial interests of young children and/or clear the mortgage in the event of death.
It is possible to use permanent life insurance to 'move' money outside of the deceased's estate. This tactic is often recommended by financial advisors when their client has other property and investments that means that they would otherwise pay a large amount of inheritance tax. Although the premiums are expensive (particularly for those who are older), taking out a whole life policy and nominating a beneficiary outside the estate can reduce the amount of tax that will become payable upon death.
A Whole Life Policy Has a Cash-in Value
Due to the investment element, a permanent life insurance policy can be cashed-in. This can be helpful when the insured is in a tight spot financially and/or is unable to maintain the monthly premiums due to an unfortunate change of personal circumstances. However, a whole term life insurance policy shouldn't be considered to be an investment plan as the long term returns do not compare favorably with investing in equities.
Comments