In layman’s terms, permanent life insurance is a type of life insurance product where the policy stays in force even after the death of the insured. If the policy is kept current, death benefits are paid out regardless of the death of the insured. In addition, this type of policy has a built-in savings component known as the “cash value” which grows the longer the policy is in effect and against which the owner of the policy can borrow at a low interest rate. In some instances, the owner can also withdraw this cash value to meet a specific need. However, this cash value cannot be immediately borrowed or withdrawn by the owner right after taking out the policy as it takes time for sufficient cash value to accumulate.
In the event that the owner decides to borrow against the cash value, the amount of the unpaid interest on the loan plus the outstanding loan balance must not exceed the amount of the policy’s cash value or else the policy and all coverage will terminate. Furthermore, the death benefit is reduced by the amount borrowed or withdrawn.
Given the nature of permanent life insurance, it is easy to see why the premium for this type of insurance runs high. On the one hand, these premiums remain at a fixed amount over the years. While taking out a permanent life insurance may seem more expensive in the short run, in the long run it is far less so as it provides more options in the future. Provided that there is enough money accumulated, the cash value can be used toward the premium payment to continue the current insurance protection. Besides the cash value, there is a great possibility that at a certain time, the owner might recover every dollar spent on the policy.
At a certain point, it is also possible that the policy will have enough cash value that its dividends will be enough to take care of the succeeding premiums. There is also the option of surrendering the policy before death and collecting the accumulated cash value. It bears noting that the growth of the cash value is tax-deferred. This means that as long as the policy remains active, the owner need not pay taxes on any earnings in the policy. As a rule, policy loans are not considered taxable income so that withdrawals (up to the amount of the premiums paid) can be taken without being taxed.
Life is full of uncertainties and no one can predict what will happen tomorrow. Permanent Life Insurance is the best way to go especially if you have money now and can afford it.