|
|
|
 |
|
Permanent Life
Insurance 
|
 With Permanent
Life insurance, part of your premium goes toward the insurance portion of your
policy, a small part of your premium goes toward administrative expenses, and
the balance of your premium goes toward the investment or cash portion of your
policy.
The Permanent Life policy provides insurance coverage for the
entire life of the insured regardless of how many years the premium is paid.
Premiums may be paid throughout the insurers entire life or for a portion of
his life (e.g. 10 years, 20 years, 30 years). Additionally, premiums can be
paid in one lump sum when the policy is taken out. This is referred to as a
single premium, Permanent Life policy. Ordinary, or Straight Life, is how the
policy is referred to if the insured pays premiums throughout his entire life.
Limited Life, is how the policy is referred to when premiums are to be paid
over a specified period of time (e.g. 30 years or until age 65).
The
cash value portion of Permanent Life insurance belongs to the insured. You can
take it out in the form of policy loans or you can cash the policy in. An
advantage to Permanent Life is that the interest you accumulate through the
investment portion of your policy is tax-free until you withdraw
it.
Another advantage of Permanent Life insurance is that the premiums
are fixed. Regardless of your age or health, you pay the same amount for the
coverage each year.
The premiums are higher for Permanent Life Insurance
as opposed to Term Insurance. In fact, they are substantially higher. The
reason for this is that the policy has investment features as well as death
benefits. Another thing to keep in mind is that the cash portion of your policy
builds up slowly during the first several years because most of the premium
goes to cover commissions and administrative expenses. Because of the slow
buildup of cash in the policy, it is not recommended that this type of policy
be purchased if the insured is going to hold it for five years or
less.
One drawback to a Permanent Life policy is that the investment
vehicles in the insurance company's portfolio dedicated to Permanent life are
generally bonds and mortgages. These types of investments carry substantial
interest rate risk. And, as we saw in the eighties, mortgages can lose value
very quickly.
When evaluating Permanent Life policies, we recommend
comparing the return on the investment portion of the policy to alternative
investments. Remember to compare apples to apples. When comparing, use the same
time period. For instance, compare the Permanent Life policy to other
investments in the same year or over the same period of years. Then compare the
Permanent Life policy to other Permanent Life policies during the same time
period. This will enable you to see how well the investment portion of the
Permanent Life compared with a range of alternative Permanent Life policies and
how it did competitively with other types of investments.
|
|
 |
|
