What is permanent life insurance?

  • Permanent life insurance is life insurance that never expires, unlike term life insurance which ends after a specified period of time.
  • In addition to a death benefit, permanent life insurance has cash value that accumulates interest on a tax-deferred basis — and you can use the cash value during your lifetime.
  • If you cancel your permanent life insurance, you receive the cash value, but must pay taxes on it.
  • Premiums for permanent insurance are expensive in the early years but decrease as you age.
  • Policygenius can help you compare life insurance policies to find the right coverage for you, at the right price »

Life insurance is a contract between you and the life insurance company where you pay premiums (monthly or annually) for a payout that your living relatives will receive, known as the death benefit. Should you die, the insurance company pays the death benefit to your chosen beneficiary.

“If you don’t make it home and someone relies on your income to live, you need life insurance,” Mark Williams, CEO of Brokers International, told Business Insider.

There are two types of life insurance: permanent life and term life. Term life insurance is best suited to younger people who want to protect their family, since it’s more affordable. However, as its name implies, term life insurance only lasts for a specific period of time. 

Unlike term life insurance that only lasts for a specific timeframe, permanent life insurance never expires. Also, permanent life insurance has a cash value component in addition to the death benefit. You can take a loan on the cash value or use it as collateral during your lifetime, tax deferred. This is why permanent life insurance is considerably more expensive than term life insurance.

Permanent life insurance lasts until you die, or an average of 110 years, which is why it’s more expensive in the early years of policy, but the older you get it becomes less expensive. According to Williams,”in the early years of overpayment, the cash value put inside the policy earns interest and you use that bucket of money to offset the cost of insurance when you’re older.” 

You can also use the cash value of permanent life insurance during your lifetime, for things such as paying your children’s college tuition, funding a business, or purchasing a second home. Most people use the cash value to fund their retirement — paying themselves a monthly income when they stop working. Due to these features, permanent life insurance can function as an investment and wealth-building tool.

There are different types of permanent life insurance. They all have death benefits as well as a cash value that grows on a tax-deferred basis. The big difference between the types of permanent life insurance policies is how they manage the cash value.

  • Whole life: Guarantees the exact same payment for the life of the policy. The insurance company invests your money (premium) with its own portfolio. The attraction is that your payment stays the same for the life of the policy. Many whole life insurance companies offer increasing the death benefit over time. 
  • Universal life: Created in the 1980s when interest rates were high, this policy has a cash value like whole life. Universal life allows you flexibility based on the interest rate paid in the policies. You can increase the death benefit over time with the same payment from excess cash value money. You can also raise or lower your benefit. If you lose your job, call the insurance company to decrease your death benefit in half so your payment can go down. It also gives you the ability to change if circumstances change. 
  • Variable life: This type permanent life insurance was created years after universal life for people who didn’t like how whole and universal life commingled their money with the insurance company to be invested. Variable life is for those who want control over the way their cash value earns interest. Variable life is not invested with the insurance company, but the stock market. If the market does well, so do you, but if the market falls, so does your cash value, making it riskier than whole and universal life. 
  • Variable universal life: Variable universal life is a combination of universal and variable life. You can raise or lower your death benefit and have your cash value invested in the stock market. Again, this is risky, because as the market fluctuates, so does your cash value. Williams said that variable universal life acts and feels like a 401(k), but it has a death benefit and cash value that grows tax deferred. Because your cash value is invested in the stock market it’s riskier. 

Additionally, they offer riders that can be added to the policy. Some riders include: waiver of premium if you are sick, hurt, or disabled; long-term care for assisted living, in-home or nursing facility; and a family rider which puts the entire family under one policy.

Every rider is an additional cost that increases the premium on your permanent life insurance policy, but it’s better than having multiple policies. Williams noted that riders vary depending on the insurance company, and that you must buy riders up front. 

If you decide you don’t want your permanent life insurance policy anymore, you get the cash value back. However, Williams warned that because the money inside the policy has been growing on a tax-deferred basis, you will pay taxes on it.

Williams said if you cash the policy in, no more death benefit, you are literally canceling policy. This is also known as cash value surrender — giving up a permanent life insurance policy that has cash value.

Permanent life insurance is considerably more expensive than term life insurance because of the cash value aspect of this kind of policy, and because the policy never expires. 

Here’s how much a whole life permanent life insurance policy would cost per month at various ages, for both $25,000 in coverage and $50,000 in coverage.

Data from Insurance.com

High-wealth individuals typically have permanent life policies; the cost is considerably more than term life insurance. A permanent life policy is the best option if your anticipate needing more insurance needs change as you age, since you’ll be able to add riders without the need for multiple policies.

Also, you can increase your death benefit over time with a permanent policy. If you can’t afford a permanent policy, get a term life policy that can be converted to a permanent policy

Williams also suggests a combination of permanent and term life insurance. For example, if you have $200,000 in permanent life and $300,000 in term for 20 years, at the end of 20 years the term life insurance policy goes away but you have earned cash value on the $200,000 permanent policy.

However, you should only purchase what you can afford. It’s important to talk to a financial advisor about your financial situation and goals to determine what life insurance is best for you.

Ronda Lee is an associate editor for insurance at Personal Finance Insider covering life, auto, homeowners, and renters insurance for consumers. She is also a licensed attorney who practiced litigation and insurance defense.

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