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Life insurance policies fall into one of two categories: term or permanent life insurance. Permanent life insurance policies are active your entire life as long as you pay your premiums, whereas term policies are only active for a set number of years. There are several different kinds of permanent life insurance. Bankrate’s insurance editorial team has put together a guide to help you better understand what permanent life insurance is and whether or not it’s right for you.
- Permanent life insurance policies generally have two components: a death benefit and a cash value account, which functions like a savings or investment vehicle.
- You may be able to withdraw or borrow money from the cash value account, although restrictions typically apply and any money not repaid will reduce your death benefit.
- Permanent life insurance is usually more expensive than term life insurance, as the insurer is essentially guaranteed to have to pay out the death benefit as long as premiums are paid.
- There are five main types of permanent life insurance policies, which differ in terms of how the cash value is invested and how adjustable the premiums and death benefit are.
What is permanent life insurance?
A permanent life insurance policy has no expiration date, so long as you pay your premiums. Most permanent policies have two components: a death benefit that is paid to your beneficiaries when you pass away and a cash value portion that functions like a savings or investment account. Term life insurance, on the other hand, solely consists of a death benefit and expires after a predetermined number of years (typically between 10 and 30).
For some, the cash value portion of a permanent life insurance policy is an attractive perk. This account grows tax-free and may be used in a few ways. After a waiting period, you might be able to borrow money against your cash value account or use it to pay your policy premiums. In some cases, you may even be able to withdraw money from the account and use it to finance major expenses — like your children’s college tuition — but this might reduce the death benefit to your beneficiaries.
If you choose to terminate your permanent life insurance policy, you will effectively forfeit the death benefit. However, you still might receive the cash value amount, less any surrender charges or other administrative costs charged by the life insurance company.
How does permanent life insurance work?
With permanent life insurance, your premium payments typically go toward both your death benefit and your cash value account, which builds up over time, accruing value. Depending on the type of permanent life insurance policy you have, the cash value component can act like a savings account, an investment account or a little bit of both.
As mentioned, you may be able to withdraw money from your cash value account to pay certain expenses — although restrictions on the amount and timing of withdrawals may apply. In addition, many life insurance companies allow you to borrow money against your cash value account. While exact details will vary by insurer, you may receive better rates if you borrow from your insurance company than you would with a local bank or credit union.
Keep in mind that any money you fail to repay will likely be subtracted from your death benefit. If you’re considering borrowing money in this way, you may want to speak with a financial advisor who can go over the pros and cons specific to your situation.
Advantages of permanent life insurance policies
The best life insurance policy for you will depend on your financial situation and how much you want to leave to your loved ones after you are gone. That said, there are multiple benefits of a permanent life insurance policy:
- The policy remains active for your entire life, as long as you pay your premiums: You won’t have to worry about renewing or extending permanent policies like you would with term life insurance.
- You typically only have to undergo one medical exam: With term life insurance, you may have to get an additional medical exam if you still want coverage after your term ends, or if you wish to convert your term policy to a permanent policy. Depending on your health and the insurer, a second exam could potentially result in a higher premium. With permanent life insurance, you typically only take one medical exam at the time you purchase the policy.
- The policy’s cash value account offers additional financial tools: The cash value portion may allow you to withdraw or borrow money as needed, with some limitations. This could be an added benefit to those who already plan to have a life insurance policy in place for the duration of their life.
Disadvantages of permanent life insurance policies
Despite the potential advantages, permanent life insurance policies aren’t for everyone. It’s important to note a few of the possible downfalls of a permanent policy:
- Other investment vehicles may be more lucrative: Most cash value accounts cap returns, which limits how profitable these investments can be. Some permanent life insurance policies may also be subject to market index changes.
- Permanent life insurance premiums can be more expensive than term life insurance premiums: Term life insurance is usually a more affordable life insurance option because insurers face less of a chance of paying the policy out. If you don’t need lifelong coverage and having a low premium is important to you, a term life insurance policy might align better with your current circumstances.
Types of permanent life insurance
There are five main types of permanent life insurance policies. They are distinguishable by how they invest the cash value portion of the policy, whether you can adjust the premium amount and if you can increase or decrease the death benefit.
- Whole life insurance: This is the most basic type of permanent life policy. Whole life guarantees you a minimum rate of return on your cash value and the death benefit remains fixed. In some cases, the policy might provide you with dividends that you could choose to use to pay your premiums.
- Universal life insurance: This type of policy usually gives you more flexibility. Universal life typically allows you to adjust your death benefit or the cost of your premiums. However, the amount of interest that the cash value portion pays will rise and fall in tandem with general interest rates.
- Variable life insurance: This type of policy typically allows you to modify the death benefit. With variable life, the cash value is generally invested in the stock market. While this may lead to bigger gains, it could lead to significant losses.
- Variable universal life insurance: As the name implies, this life insurance policy combines elements of universal and variable life insurance. Variable universal life insurance offers adjustable premiums and death benefits, and the cash value is typically invested in the stock market. The cash value gains or losses may or may not be capped, depending on your insurer.
- Indexed universal life insurance: The interest that an indexed universal life insurance policy earns is tied to the performance of an underlying financial benchmark, such as the S&P 500. However, this type of life insurance typically protects the policyholder against market drops. When an index rises during a given crediting period, the policy pays a proportional amount of interest into the cash value. If the index declines, then no interest will be earned, but the cash value will not decline. Generally speaking, indexed universal life insurance policies also have the same types of flexibility as universal and variable universal policies.
How much does permanent life insurance cost?
Permanent life insurance is usually more expensive than term life insurance because a payout from the insurer is essentially inevitable. It might help to think about it like this: with a 10-year term policy, there is a possibility — but not a guarantee — that you pass away while the policy is active and the insurer pays out the death benefit. With a permanent policy, it’s not a question of if but when.
How much you pay for a life insurance policy will vary based on personal factors as well, such as your age, gender, overall health and the amount of coverage you want. Whether you smoke, have a risky job or partake in dangerous hobbies also factors in. Some insurance providers require a medical exam too, especially if you decide to purchase a policy with a higher death benefit.
Typically, the larger the death benefit, the higher your premium will be. To get the best price, experts recommend shopping around and comparing quotes before you commit to a policy.
Who should buy permanent life insurance?
If you can relate to one or more of the following scenarios, permanent life insurance may be a good option for you:
- You don’t want to worry about renewing a life insurance policy down the road.
- You don’t mind paying extra for lifelong coverage.
- You want a cash value account.
- You want to leave your heirs a more sizable inheritance.
- You have a lifelong dependent, like a loved one with a disability, who you want to provide for after you’re gone.
A term policy may be better suited for you if you only need coverage while your children are young. Or if you already have a healthy amount of savings, you may not need a life insurance policy at all. If you’re debating between term vs. permanent life insurance, speaking with a licensed life insurance agent can help point you in the direction that’s best for you and your beneficiaries.
Frequently asked questions
The best life insurance for you will depend on your financial goals. If you only want coverage for a specific period, such as when your children are young, a financial advisor or licensed agent may recommend term life insurance. If you want lifelong coverage and a cash value account, however, a permanent life insurance policy may be a better fit.
Part of your premium payment goes toward your cash value account, which builds value over time. These accounts can accumulate interest and/or returns. Some policies allow you to choose the investment funds associated with your cash value account. As the account accrues value, you may be able to pay your premiums with the money in the account, withdraw it or borrow against it.
Thinking about life insurance for your children may not be the most pleasant experience, but it could save you or your loved ones from unexpected financial burdens, such as funeral expenses. Another reason parents might want to purchase life insurance for their children is to help make them more insurable in the future. Typically, the earlier you have a life insurance policy, the more affordable the rate. The child may be able to lock in a low premium prior to developing any health issues. In some cases, it may also be possible to convert a child life insurance policy to a term or permanent policy later in their life.