Types of permanent life insurance include whole life, universal life and variable life policies. These policies are considered permanent life insurance because they should last for the insured’s entire life. Permanent life insurance is just like an old 1980’s perm; in hair years, it’s permanent and you won’t be getting rid of those luscious curls until you get a haircut.
Just like there are types of permanent life insurance, there are types of perms, such as 1980’s Prince, 1990’s Mariah Carey, and, of course, Peggy Bundy. I know what you’re thinking, thank god perms don’t last an entire lifetime, there would be millions of depressed people out there who hate their lives. That may actually happen if you purchase the wrong permanent life insurance policy considering it’s designed to last for the lifetime of the insured. So make sure to do your research before coming to a decision on the particular type of permanent life insurance if that is the route you go.
Permanent insurance has an opposite which is called term insurance. Another way us financial people refer to the different types of life insurance are between “term and perm”. So this post isn’t really THAT creative if you think about it. I already refer to permanent life insurance as perm, I just connected the dots to the glorious larger-than-life hairstyle of the 1980’s.
Term insurance is not lifelong and does not build cash value like the permanent policies often do. A term insurance policy is like curling your hair at home; it’s not considered permanent. In this article we will focus on permanent insurance but you can click the link below to read my term life insurance article:
Whole Life – The Prince Perm
We are going to categorize whole life as the Prince perm equivalent of life insurance. Prince, while he was flashy and a complete rock star, was reserved in his personal life. Whole life is like Prince’s personal life; boring. It’s not designed to grow at particularly high rates of return, and it’s not designed to have risk. It does exactly what it is designed to do; be boring and stable.
Whole life will grow at an acceptable rate of return over the long term. Most whole life policies are designed so that the cash value lags in the first few years. Many times the first two years of a whole life policy will have little to no cash value, then the cash value will start building after year two.
Whole life is the more boring life insurance within the permanent insurance category. Long term, if you own whole life insurance, no doves will cry.
(p.s. doesn’t Prince look weird without facial hair?!)
Universal Life – The Mariah Carey Perm
The Mariah Carey perm is considered the universal life perm. Universal life insurance can have some risk to it. A universal life policy’s growth is determined by interest rates. A universal life insurance policy will work out fine early on in the policy’s life even if interest rates don’t do well. A young universal life policy will act just like Mariah Carey when she was young and pretty normal.
Problems can occur with universal life insurance as the policy ages. As the policy gets older the cost of the insurance can increase. If the interest rates do not do well inside the policy as the cost for the insurance increases, the policy could lapse in the future. So you may end up with a life insurance policy which more closely resembles Mariah Carey in her older years when she wasn’t exactly as young and innocent as she was younger in her career.
If interest rates don’t do well and the cost of insurance increases later in life, you won’t exactly be singing, You’ll always be my baby. (Sorry, couldn’t resist!)
Variable Life – The Peggy Bundy Perm
The Peggy Bundy perm is the variable life perm. You aren’t really sure if you are going to get home and see a red headed, permed, Peggy Bundy, cooking a turkey while smoking a cigarette as a fire ignites inside the oven in the kitchen. It’s completely possible you walk in and Peggy is just sitting on the couch watching Oprah just minding her own business. You really just don’t know.
Variable life insurance is a bit of a giant question mark. Since a variable life insurance policy has it’s funds invested in underlying mutual funds, the policy may increase in value or decrease in value. Variable life is the riskier of the life insurance policies mentioned since it will fluctuate in value so much. Just like the universal life insurance policy, the costs of the insurance expense will increase as the insured ages. This may lead to higher expenses that may eat into the investments in the variable life insurance policy. If the policy declines in value enough due to a recession or economic downturn, the policy may lapse when the insured is older and they will loose their life insurance.
It’s completely possible that a variable life insurance policy works out fine over the long run. It’s just a little more sporadic and Peggy Bundyish than the other two policies mentioned.
Permanent Life Insurance Policies and Characteristics
- Whole Life – Builds cash value and pays dividends, owner pays a specific premium for the death benefit over a long term period of time. Dividends can be reinvested and the death benefit can grow as the dividends purchase “paid-up additions”.
- Universal Life – Builds cash value and pays interest, owner can pay a flexible premium payment for the policy death benefit. The owner has the option of electing an increasing death benefit or a stagnant death benefit.
- Variable Life – Premiums are invested in investment vehicles often times invested in underlying mutual funds made up of stocks, bonds, or money market funds. Death benefit may increase or decrease based on investment performance.
All three permanent life insurance policies are designed to build some type of cash and/or investment accumulation. Whole life has guaranteed cash values, and universal and variable life policies don’t. All of these policies allow for a tax free death benefit for the beneficiary of the policy. Whole life has a fixed premium and universal and variable life policies can have more flexible premiums.
Purchasing life insurance can be a difficult choice considering the complexities of the products available. So make sure you do your research if you are looking into purchasing a permanent insurance policy. You could be signing up for a lifelong perm if you get the wrong one, that won’t be good!
Before we end this amazing article, I have to make sure I answer the question I know you are all asking yourselves, “Why didn’t he include Richard Simmons?”
Well, I don’t have a great answer for you. Mariah, Prince and Peggy all came naturally to me, and Richard, while he is the perfect example, just didn’t make the cut.
But how great is this picture, right?! This picture is pure gold. Just amazing.