Permanent Life Insurance

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).

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.

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.

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 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.

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.