Permanent Life Insurance

What Is Permanent Life Insurance?

Permanent life insurance is one of the two main types of life insurance available — the other being term life insurance.

A permanent life insurance policy does not expire, meaning it provides lifetime coverage with a death benefit paid out upon the policyholder’s death.

The policies also feature a separate cash value component allowing you to build savings within the coverage that you can use within your lifetime.

Types of Permanent Life Insurance

There are two main types of permanent life insurance: whole life and universal life insurance.

Whole life insurance policies spread the cost of insurance over a much longer period than term insurance. This keeps the cost of your premiums consistent — but it makes the premiums considerably higher than term life for younger policy holders.

Some whole life policies require you to pay premiums for as long as you have coverage. Others only require you to pay for a specific number of years — but you’re covered for life.

Universal life insurance is the most flexible type of life insurance policy. You can change or skip premium payments and change your death benefit more easily with universal life than with any other type of life insurance.

Universal life policies treat the different elements of the policy separately. These three elements are the death benefit, savings component and premium.

Interest rates on your savings component are linked to an external index — such as Treasury bills — so the amount of cash value in your policy may fluctuate with changes in the market.

Permanent Life Insurance vs. Term Life Insurance

Permanent life insurance is more expensive and more complicated than term life. But it does offer other benefits that term insurance does not.

The key difference is that permanent life covers you for your entire lifetime and offers a savings feature missing from term policies.

Differences Between Permanent and Term Life Insurance

How Does Permanent Life Insurance Work?

Permanent life insurance can be very flexible, so you can work with a financial advisor or other professional to tailor it to your needs.

You start by determining how much of a death benefit you need. This is the amount the insurance will pay out to your beneficiaries when you die.

You can then decide how long you want to pay premiums — say, until age 65 or 80. The longer you choose to pay, the lower your premiums will be. The shorter the duration, the higher the annual premium.

With whole life insurance, your premiums will remain the same throughout the time you pay them. But with some other types of permanent life insurance, the amount of the premiums may change from year to year or month to month.

Once the policy is in place, your beneficiaries will receive a guaranteed death benefit once you die. But if the policy is in effect for a long period of time, it will start to accumulate a cash value — creating a savings component.

Some permanent life insurance policies also pay dividends. If your policy does, then the cash value may grow faster while increasing the amount of your death benefit. These dividends can be used to help pay your premiums.

As the cash value grows, you’re able to borrow from the policy — or use the policy’s value as collateral for a bank loan. If you borrow from the policy, the insurance company will reduce the amount of the death benefit until you pay back the loan.

Pros and Cons of Permanent Life Insurance

Because permanent life insurance is complicated and expensive, it typically isn’t the best life insurance choice for most people. You should compare the pros and cons of permanent life policies as well as looking at term life insurance before deciding if it’s right for you.

Advantages of Permanent Life Insurance

Permanent life insurance is advantageous if you need to provide your beneficiaries with a death benefit regardless of how old you are when you die — even if you live to be 100.

But most other advantages stem from using permanent life insurance as an investment vehicle — because the policy builds cash value over time. It also provides several tax benefits associated with this savings feature.

Tax Benefits of Permanent Life Insurance

• Cash value in a permanent life policy grows on a tax-deferred basis — meaning you don’t pay income taxes on it as it increases in value.
• If you surrender your coverage or receive dividends on your policy, you don’t have to pay income taxes unless the amount is greater than the premiums you’ve paid.
• You don’t have to pay taxes on the money you take out of the policy in the form of a loan — so long as the loan and interest on the loan is less than the policy’s cash value.
• Your beneficiaries do not have to pay income tax on the death benefit from permanent life insurance (but the same is true for term life insurance death benefits).

Permanent life insurance also allows flexible premium payments. You can structure your premiums so that you can fully fund your coverage over a fixed-period of time. This way, you can stop making payments but still have full coverage from the policy — even as your cash value continues to grow through interest and dividends.

Disadvantages of Permanent Life Insurance

The biggest disadvantage of permanent life insurance is the cost.

Permanent life insurance is expensive because it covers you for your whole life. Most people don’t need this much coverage. Term life insurance is cheaper — because it covers you for a specific period of time — and tends to work better for most people.

If you start with a term policy, you can convert it to permanent life insurance later on. But you can’t convert a permanent policy to term life. This can be a problem if you start with a permanent life insurance policy and realize later that it isn’t right for you.

If you can’t make your premium payments, you could lose coverage. This means you’d have to buy a new policy later on — likely at an even higher price — if you want to continue coverage.