What Is Permanent Life Insurance?
Permanent life insurance provides coverage for the full lifetime of the insured person. While permanent life is more expensive than term insurance, permanent policies combine a death benefit with a savings component that earns interest on a tax-deferred basis.
The two primary types of permanent life insurance are whole life and universal life. The cash value of whole life insurance grows at a guaranteed rate. Universal life insurance also contains savings and a death benefit, but it features more flexible premium options and its earnings are based on market interest rates. Variable life and variable universal life also provide expanded options to invest the cash value in mutual funds and other financial instruments.
Once you've picked the policy that's right for you, remember to thoroughly research the firms you're considering to ensure you'll get thebest life insuranceavailable.
Key Takeaways
- Permanent life insurance refers to coverage that never expires (unlike term life insurance).
- Most permanent life insurance combines a death benefit with a savings component.
- Whole life and universal life insurance are two primary types of permanent life insurance.
- Life insurance policies enjoy favorable tax treatment.
- Permanent life insurance policies have much higher premiums than term life insurance policies, which lack a savings component.
Understanding Permanent Life Insurance
While term life insurance only promises to cover you for a certain period of years, permanent life insurance lasts your lifetime (hence, the name) as long as the policy owner pays the premiums.
Permanent life insurance premiums cover the cost of the policy’s death benefit and allow the policy to build cash value. The policy owner can borrow funds against that cash value through a policy loan or withdraw cash outright to help meet needs such medical expenses or a child’s college education.
An insurer charges interest on an outstanding cash value loan. If the total unpaid interest on a policy loan plus the outstanding loan balance exceeds the amount of a policy’s cash value, the insurance policy and all coverage will terminate.
Permanent life insurance policies enjoy favorable tax treatment. Cash value generally grows on a tax-deferred basis, which means the policyholder pays no taxes on earnings as long as the money stays in the policy. Some money can also be withdrawn from the policy without taxation. Generally, withdrawals up to the total of premiums paid are not taxed. Taking cash value out of a permanent policy through a withdrawal or outstanding loan will reduce the future death benefit for heirs.
Many term life insurance policies offer the option to convert the coverage to permanent life insurance before the term expires.
Permanent Life Insurance vs. Term Life Insurance
Different people have different insurance needs at different periods of their lives. Both whole life and permanent insurance provide a death benefit as long as premiums are kept current. While term life insurance is popular for its lower premiums, term coverage typically will expire well before the end of your life. You can usually extend term coverage once the initial period ends, but your premiums will increase.
Term insurance is often used by younger families to provide coverage until they pay off most of their debts and accumulate enough savings to make a large amount of life insurance unnecessary. However, other people may decide they’d prefer the ongoing coverage and savings opportunities provided by a new permanent policy.
For this reason, many term life policies offer the option to convert the coverage to a permanent policy later, often without needing to take medical exams or meet other qualification standards. The conversion feature could be appealing for someone with medical issues that could make a new policy prohibitively expensive, or those with chronic conditions that might eventually require them to draw ongoing expenses from the savings portion.
While the premiums for permanent life insurance are much more expensive than those for term coverage, people who get permanent policies typically have earned enough money by that stage of their lives to afford the increased costs. With the added opportunity for savings, they can also use it as a tax-favorable investment vehicle to cover the needs of lifelong dependents or for estate-planning purposes.
Advantages and Disadvantages of Permanent Life Insurance
There are pros and cons to purchasing permanent life insurance. If you can afford the higher premiums, permanent life insurance allows you to provide a death benefit to your beneficiaries without the limitations of term life insurance. A permanent life insurance policy allows you to build savings in an account with tax advantages. You can also borrow from or withdraw those funds during the lifetime of the policy.
The downsides to purchasing a permanent life insurance policy are the high costs of premiums, the risk of not being able to afford to keep up with payments, and that taking out the policy's cash policy value reduces the death benefit.
What Is Permanent Policy Life Insurance?
Permanent life insurance is a life insurance policy that doesn't expire until the death of the policy holder. It usually comes with a cash value savings component.
What Are the Four Types of Permanent Life Insurance?
The four types of permanent life insurance policies are universal life, whole life, variable universal life, and variable life.
What Is Better, Term or Permanent Life Insurance?
Both term and permanent life insurance can help you protect your loved ones financially. You should buy the one that offers premiums you can afford. Permanent life lasts longer and has a cash value component, but its premiums are usually much higher than term life insurance.
Can You Cash Out Permanent Life Insurance?
Yes, you can cash out permanent life insurance after it has been in force for several years. You can take out a loan against your policy, withdraw money from the cash value, or surrender the policy. If you do the latter, you may be forced to pay surrender fees and taxes on your withdrawal.
How Long Does Permanent Life Insurance Last?
If you pay the premiums on your policy and do not let the policy lapse or surrender it, a permanent life insurance policy will last your lifetime.
The Bottom Line
Permanent life insurance pays out a guaranteed benefit upon the insured's death. Most policies contain a cash value savings component that earns interest and grows tax-free while the coverage remains in force. You can also withdraw or borrow against the cash value while alive. However, premiums for permanent life coverage are significantly higher than those for term insurance.
