There’s comfort in knowing that your life insurance will protect your loved ones financially when you pass away. If you’re interested in a policy that lasts your lifetime, then permanent life insurance will be your best option. As a bonus, you’ll also be able to accumulate additional cash through your policy.
There’s no doubt that permanent life insurance can be rewarding, but it can also be complex and a serious financial responsibility. To save you the headache of figuring things out on your own, I created this article to fill you in on the most important facts you should know about permanent life insurance before purchasing a policy.
Some of these might surprise you.
1. Each Permanent Life Insurance Policy Type Is Different
Insurance companies offer a variety of permanent life insurance policies, including:
- Whole Life Insurance
- Universal Life Insurance; and
- Index Universal Life Insurance.
Some providers may only offer one type, while others provide the full spectrum.
Why does this matter?
Although all three are forms of permanent life insurance, they aren’t identical. Generally, permanent life insurance is more costly than term life insurance because it accumulates cash value. Whole Life Insurance has more expensive premiums than the other policy types, but Index Universal Life Insurance could be more lucrative. Before you select which product is best for you, be sure you can afford your insurance plan, especially if payments increase over time.
Ultimately, the type of permanent life insurance you choose depends on your current financial situation and long-term goals. That’s why it’s essential to understand the difference between insurance policies before signing up for anything.
2. The Younger You Apply for Permanent Life Insurance, The Better Your Rate
Your age can make or break your chances of receiving permanent life insurance. Providers believe that age is an indirect reflection of your health status. They assume that younger applicants are healthier and less risky to cover.
As a result, there’s no better time to apply than the present—if you’re interested in paying cheaper premiums.
However, if you can’t afford permanent insurance now, some companies allow you to convert a term policy into permanent life insurance when you’re ready. You could start at a low premium with term insurance and convert to a permanent life policy when you’re financially able.
3. Permanent Life Insurance Applications Can Get Personal—Answer Honestly
Permanent Life Insurance quotes only give an estimate for your prospective policy. Your actual payment depends on your application details. Insurance questionnaires can be lengthy and usually request information about your personal life. You may need to disclose your:
- Age
- Sex
- Height and weight
- Mental health history
- General medical status
- Family medical history
- Smoking and drinking habits
- Driving record
- Employment status
- Job description
- Hobbies and leisure activities
Companies use these details to identify the risk of approving you for life insurance. They could disqualify your application if you have a terminal illness, severe chronic health condition, history of drug abuse, or if you partake in hazardous work activities.
This might be discouraging, but ensure that you answer each question truthfully. Some permanent life insurance providers use third-party companies to confirm your details.
4. You Might Not Need A Medical Exam
Exam-free insurance applications are becoming more popular in the life insurance industry. Some insurance providers might only use your basic health data to process your application. Others offer an Accelerated Underwriting Policy, where they partner with external sources to collect additional information about your medical records, prescription history, and police and driving reports. It may take weeks for these companies to confirm your details. However, you can still request temporary coverage while waiting to complete your application.
A few permanent life insurance providers exclude any health information from your application. I call this Guaranteed Issue Life Insurance. As you can imagine, this would be the most expensive type of permanent life insurance, but it’s also the fastest and easiest way to get approval (as long as you can afford it long-term).
5. Your Policy Should Cover More Than Just Debt Payments
One of the biggest mistakes insurance applicants can make is underestimating the amount of insurance coverage their family needs. Most people think instantly about paying off their mortgage or burial expenses. But life after loss doesn’t end right there.
You should also consider your family’s livelihood immediately after your death. How will they pay the bills and ongoing tuition or continue to afford childcare? If you were the breadwinner, your family would need extra cash to survive while they search for other means of income.
We suggest planning for a policy that covers about 5 to 10 times your annual income. Of course, you could request a lower death benefit if you already have considerable emergency savings or if you have few financial responsibilities depending on your paycheck.
6. Comparing Permanent Life Insurance Rates Could Save You Money
Most insurance providers offer free online quotes that you can use to compare rates with their competitors. Ideally, you should compare at least 3 quotes before deciding on an insurance policy.
Moreover, you’re entitled to a brief review period to clarify the terms of your insurance before finalizing your purchase. You can use this time to ask questions about death benefits, premiums, and other policy features.
However, your focus shouldn’t be on the price tag. It is important to partner with a reputable permanent life insurance company with a track record for paying benefits in full and on schedule. You can search for an insurance provider’s claims history to learn more about their performance and reliability. Insurance companies will not cover invalid or fraudulent claims, but they usually explain why they rejected your permanent life insurance application.
If you’d like to be more thorough in your research, you can check out independent agencies like A.M. Best, S&P, and Moody’s for additional insurance company ratings.
7. Your Beneficiary Could Backfire—Plan Wisely
The beneficiary is the person that you choose to inherit the death benefits from your permanent life insurance policy. Keep in mind that insurance providers can’t release funds directly to minors. Therefore, it’s not a good idea to name anyone under 18 as your sole beneficiary.
Instead, you could create a trust for the child that you choose as your beneficiary. That way, your insurance company will transfer your benefits to that fund through legal arrangements that you make beforehand.
Likewise, you could open a Uniform Transfers to Minors Act (UTMA) account on behalf of the child. In this case, the death benefits will be deposited into the account and released to your heir when they turn 18 or 21, depending on state regulations.
Another option would be to name a guardian as the beneficiary, then have them use the funds for your child’s well-being. In hindsight, this doesn’t always play out as expected—some guardians may have ulterior motives for the inheritance. Soap operas aside, these issues are more realistic than you’d imagine!
8. There’s a “Free Look Period”
By law, policyholders have the right to approximately 10 days to test out a permanent life insurance plan and see if it works for them. The actual duration of the free look period varies by the insurance company and state guidelines. Nevertheless, you can choose to alter or cancel your insurance policy during that time without incurring additional charges.
9. Permanent Life Insurance Policy Riders Can Improve Your Coverage
Some insurance companies offer riders – additional benefits – that you can use to customize your policy, such as:
- Accelerated death benefits, which releases a percentage of the death benefit to the insured if they’re diagnosed with a terminal illness that decreases their life span.
- Accidental death, which pays double the death benefit if the insured dies from an accident. As a result, this rider is also referred to as double indemnity.
- Premium waiver, which exempts the insured from paying monthly premiums if they become permanently disabled or jobless due to injury. Premium payments will resume once the insured is back at work or re-employed.
- Family income, which provides a regular income to family members (for a designated period) after the insured dies.
- Guaranteed Insurability, which allows you to purchase extra coverage without submitting additional reports. This rider is most suitable for policyholders who just gave birth or experienced a significant change in their health and want more protection added to their insurance plan.
Riders come at an additional cost to your basic premiums, but they may be well worth the investment in the long term.
10. A Life Insurance Agent Can Help Simplify The Process
Some life insurance agents promote their company’s packages. After all, they need to sell their services!
The benefit of consulting an independent agent (like those we have here at The Purpose of Money) is that you’ll get unbiased recommendations on the best permanent life insurance policy for your situation. You deserve someone who prioritizes your circumstances and keeps your best interest at heart.
Need guidance while purchasing permanent life insurance? Book a free consultation now so we can discuss your life insurance needs and find the policy for you!