A permanent life insurance policy will provide the insured with a lump sum payment upon death. Unlike level term life insurance, there is no defined term when the policy will cease to pay out. No matter whether the policyholder passes away at 24 or 94, their estate or a nominated beneficiary receives payment. Coverage is often taken out for the purpose of tax avoidance and/or to ensure that a loved one receives a substantial sum of money when the insured is no longer with us.
How Permanent Life Insurance Works
The cost of a whole term life insurance policy increases with age so this needs to be factored-in by the provider. This is achieved by separating the premium into two parts. The first part of each premium is used to insure against the risk of mortality. Given that coverage is more affordable in the earlier years of the whole life policy (because the policyholder is younger and healthier), this leaves a sum of money that can be invested in bonds and equities. This money will be used to cover the rising cost of premiums and/or to pay out a lump sum when the insured dies.
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