Permanent life insurance coverage lasts for the entire lifetime of the insured person, contingent on the policyholder making timely premium payments. The policyholder may be the insured party, or the beneficiary of the policy. It can be a Whole Life Insurance Policy, a Universal Life Insurance Policy, or a Variable Life Insurance Policy.
Whole Life Insurance
Whole life insurance is a permanent life insurance policy that is suitable for consumers who are capable of paying consistent premiums in exchange for the guarantee that the beneficiaries will receive a death benefit that has a savings component. A part of the premium that is paid by the policyholder accumulates over time and earns interest. The remaining premium goes towards insurance coverage. The face value of the policy and the cash value are different. The former refers to the amount of insurance purchased, while the latter is the accumulated savings that can be accessed by the policyholder.
Permanent Life Insurance and its Cash Value
The cash surrender value of the policy becomes available even before the death of the insured. This is made possible by the cash accumulation component associated with it. Cash value is the amount that is available on canceling the policy before it matures, or the payout becomes imminent on account of the demise of the insured.
This is made possible in the following manner:
The policy requires the policyholder to pay a high premium in the beginning. The amount of premium that is paid is directly proportional to the age of the insured person. The premium is typically deposited in a high interest bank account. The premium earns tax-deferred interest over time, or in other words, it accumulates cash value.
The amount that is accumulated can benefit the policyholder in the following ways:
Dividends: The interest may be used in lieu of further premium payments, or the policy holder may choose to receive the money in the form of cash dividends. One must note that dividends are contingent on the cost of the policy being less than the amount that was anticipated while deciding on the premium payments. The policyholder may also choose to use the dividends to buy additional coverage.
Asset: Since whole life insurance accumulates cash value, the policyholder can choose to surrender the policy and receive the amount of cash benefit. In other words, this policy functions as an asset for the policyholder as well as the beneficiary. The latter is guaranteed a death benefit, while the former can encash the investment.
Loan: The policyholder may choose to borrow against the accumulated cash value. The borrower must ensure that the loan is repaid, otherwise, the dues are settled by reducing the amount of death benefit.
It is evident that whole life insurance offers a number of benefits to the policyholder, in addition to aiding the beneficiary. In fact, there are a number of permanent life insurance policies that offer benefits similar to those offered by the life insurance. Cash value of the policy is only one of the benefits. People who are unable to opt for term life insurance on account of advancing age may be able to buy a life insurance policy, since the latter requires the policyholder to pay a much higher premium. The high premium may be considered a disadvantage by some; however, the above discussion clearly illustrates that the advantages are well worth the high premium that is required on the policy.