In last week’s column, we noted that term insurance provides death benefit coverage for a certain period, and term premiums are very inexpensive for younger, healthy persons. As one grows older, however, term insurance premiums increase.

For example, a $1 million 20-year term level annual premium for a healthy 50-year-old is $1,624, while the same policy for a 60-year-old is $4,589.

When considering permanent insurance, the first consideration is: Will I need to maintain the policy for as long as I live? If the answer is yes, then some sort of permanent insurance could be appropriate. Most permanent policies have cash values, and those values can be a source of future premium payments or even income in future years.

Permanent life insurance policies are not suitable as short-term investments, but are most valuable when utilized for the long haul.

I am a proponent of fixed premium whole life insurance policies from top-rated mutual life insurance companies, since such companies have been around for many years. Moreover, these mutual companies pay non-guaranteed dividends to their policyholders, and these companies have doing so, in some cases, for more than 100 years.

The five companies I recommend are: MassMutual, Northwestern Mutual, Guardian, State Farm and New York Life. Policies from these companies provide death benefits for life, but such policies also provide opportunities to build wealth using the conservative investments, primarily bonds, that these companies invest your premiums in. The effect of using dividends to increase the policy cash values beyond the guaranteed values in the policy can be significant.

Additionally, these companies offer policies that can shorten the required premium-paying premium from life to something less, such as 10-pay, 20-pay, or payments to age 65. The impact of a shortened premium payment period means that the required premiums are higher per payment, since the lifetime payments have been compressed into a shorter period. Once the payment period ends, no more premiums are due, but the policy will remain in force until death. Paying premiums over a shorter time also enhances the dividends that may be credited to the policy over its lifetime.

These limited pay policies, when coupled with dividends used to purchase additional increments of death benefit, are excellent tools for building long term values, and the dividends that are credited in this manner each year are not taxable.

For example, a healthy 40-year-old executive might consider purchasing a 10-pay policy from one such mutual company. If he were to pay $15,0000 per year for 10 years and apply the dividends to purchase additional increments of death benefits each year, he could possibly withdraw $15,000 each year of tax-free income beginning at his age 70 for the remainder of his life. Were he subsequently to expire at age 100, his beneficiary would then receive a tax-free death benefit of over $685,000. These values are projections and not guaranteed, but impressive, nonetheless.

There are other forms of permanent insurance. Last week, I mentioned universal life insurance, which is particularly effective as a tool to provide death benefits for older persons. These policies are referred to as guaranteed (to a certain age or for life) universal life policies. Generally, these policies have little or zero cash values, and they bear a resemblance to term insurance

For example, a healthy female, age 75 could buy a $500,000 policy for her grandchildren at a premium of $16,084, payable up to her age 110 or until death. Were she to pass at her age 90, the internal rate of return on the premiums paid would be 7.4%. She could do worse.

Permanent insurance also includes variable life and indexed life policies. I am not a fan of either type, since the policy expenses outweigh the benefits in my view.