A personal life cover is defined as a contract with an insurance company where in exchange for premium payments, the insurance company offers a lump-sum payment (variously referred to as a death benefit) to named beneficiaries following the insured’s death. Typically, a life cover is chosen based on the goals and needs of the owner- permanent insurance such as universal and whole life provide lifetime coverage while term life cover generally provides protection for a set period of time. Remember, however, that death benefits from all types of personal life cover are generally income-tax free.
How it works
Permanent insurance provides life-long insurance protection so long as premiums are paid. With few exceptions, once your coverage has been approved, your policy cannot be cancelled by your insurance provider. Also, regardless of your health status, your coverage should remain in force.
Despite paying higher initial premiums, permanent insurance is actually less expensive in the long run with most permanent policies being eligible for dividends. If these dividend values are sufficient, you are likely to see your out-of-pocket premium payments end or drastically reduce after several years, yet your coverage should continue for life.
Permanent insurance also eliminates the problem of future insurability since it does not expire after a certain period of time. In fact, some policies come with guaranteed purchase options which should allow you to buy additional coverage at certain specified times, regardless of your health.
Lastly, permanent insurance builds cash value as the premiums you part with- some of which are guaranteed under many policies- can be used in future for any purposes you deem fit. For instance, you could borrow the equivalent cash value to provide income for your retirement, pay for your children’s education, or put a down payment on a home.
Some of the benefits of permanent life insurance include:
1. Principal protection- The cash value that your permanent insurance policy accumulates is not subject to stock market losses and thus maintains stability over time. This means that what you invest will stay with you.
2. Guaranteed growth- Regardless of how the markets are performing, what you earn should continue to grow at a fixed interest rate. Over time, your policy should build guaranteed cash values and increase with every passing year. It will never decline in value owing to changes in market conditions.
3. Extra income- The cash value of a permanent policy may be converted into an annuity which should provide you with income for life.
4. Cash source with no penalties- In instances where you may need additional financial resources to help fund unforeseen expenses, your policy can be an ideal source to help you meet these needs. Unlike IRAs and 401Ks that penalize you for accessing your funds prior to retirement, a permanent insurance policy should allow you to borrow money for any reason and pay it back at your convenience without having to pay penalties or taxes.
Who should get permanent insurance?
Permanent insurance is ideal for consumers in need of creating liquidity so as to pay projected federal estate taxes. In addition, those concerned about asset protection, where state laws provide that death benefits and the cash value of insurance policies are not subject to claims by creditors ought to apply.
Permanent insurance policies are also attractive since they contain an element of forced savings, especially in an environment of low interest rates. However, administrative and mortality costs of the policy will still be deducted.
Another situation where a permanent insurance policy is advocated for is for retired couples who are concerned about spending money because it may deplete the inheritance that they wish to leave for their children. Here, a retired couple could designate a small portion of their available funds in order to buy a permanent policy which should have a no-lapse guarantee. Such a policy would ensure that they enjoy their retirement whilst ensuring that their children receive the intended inheritance.
What to look for when comparing quotes from different companies
1. Term of the policy
The word ‘term’ denotes the period during which your premiums are fixed- the shorter the term, the lower the premiums. Therefore, do not compare the cost of a 5-year policy to that of a 15-year term because in doing so, you may actually end up buying a more expensive life cover.
2. Your age
Various insurance companies compute age differently. If you get varying quotes from various firms, make sure that they have not made a mistake when determining your age since this is one of the most important cost drivers. If your age is wrongly computed, your quote essentially becomes useless because when the cover goes into underwriting, the mistake is likely to be identified and the premium adjusted as it ought to be.
3. Your health
Needless to say, your health is very important to life insurance providers. In order to get a quote, one need not undergo a physical examination but it is highly advisable that you be totally honest about your health condition when you get your quote. Moreover, make sure that your chosen agent does not engage in any monkey business by performing the old bait and switch technique i.e. if your agent shows you a ‘preferred’ rate when you are not in tip-top shape, that quote is ultimately not going to do you any good and it is in fact a waste of time. The agent will rope you into applying for a cover that he/she knows will end up costing you more than the quote indicates. Many people caught up in this simply just give in and pay the higher rate which is a shame since there are insurance companies that cater to people with pre-existing health conditions.
This is why it is so important to be honest with the agent who is helping you and it is also equally important for them to be as honest with you.
4. Financial strength of the company
It is quite difficult to establish how strong your insurance provider is going to be when you need them-10,15, or even 20 years from now. However, rating agencies can take some of the guess work out of this process. Due diligence on the client’s part is highly advocated for and the least that you can do is to Google your chosen insurance company to see whether there is any news on them- good or bad.