Permanent life insurance

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Permanent life insurance is a broad term for life insurance policies that remain active indefinitely rather than for a set number of years. There are several different kinds of permanent life insurance. Most often, permanent life policies include a death benefit along with a cash value portion that functions like an investment vehicle.

What is permanent life insurance?

Unlike term life insurance that only remains in force for specific increments of time, permanent insurance typically has no expiration date and is designed to last for the duration of your life. The death benefit is paid out to your beneficiary or beneficiaries as either a lump sum or a series of payments. For example, the death benefit may be paid out over five or ten years.

In addition to a death benefit that pays out when you pass away, most permanent life policies come with a cash value portion that acts as a savings or investment account. The cash value account grows tax free and may be used in a few ways. After a waiting period, you may be able to borrow money against your cash-value account or use it to pay your policy premiums. In some cases, you may be able to withdraw money from the account and use it to finance major expenses, like your children’s college tuition, but this may reduce the death benefit to your beneficiaries.

If you choose to terminate your permanent life insurance policy, you will effectively forfeit the death benefit, but may receive the cash value amount, minus 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 towards both your death benefit and your cash-value account, which builds up over time, accruing value. 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 borrowing 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 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 financial situation.

Advantages of permanent life insurance policies

Permanent life insurance policies are distinct from term life insurance policies in several ways. Here are a few of the potential benefits of purchasing a permanent life insurance policy:

  • The policy remains active for your entire life, as long as you pay your premiums: You likely 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: Permanent life insurance’s cash value portion gives you an investment vehicle that typically allows you to withdraw or borrow money as needed, with some limitations. While other forms of investment may result in higher returns, this aspect can be an added perk for those who already plan to have a life insurance policy in place for the duration of their life.

Disadvantages of permanent life insurance policies

However, permanent life insurance policies aren’t for everyone. It’s important to note a few of the potential downfalls of a permanent policy:

  • Other investment vehicles may be more lucrative: Most cash value accounts cap returns, which limits how lucrative these investments can be. In addition, some permanent life insurance policies are subject to market index changes — except for indexed universal life insurance policies.
  • Permanent life insurance premiums can be more expensive than term life insurance premiums: Term life insurance is usually a cheaper life insurance option, depending on your death benefit amount and age, largely because insurers face a shorter period in which a claim may need to be paid out. If you don’t need lifelong coverage and having a low premium is important to your financial situation, you may find a term life insurance policy fits better with your current circumstances.

Types of permanent life insurance

Permanent life insurance policies fall into four primary categories, each providing different value and serving different purposes to the policyholder:

  • 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. Your beneficiaries also receive a death benefit upon your passing. In some cases, your policy might provide you with dividends that you could choose to use to pay your policy premiums.
  • Universal life insurance: This policy gives you more flexibility throughout the life of the policy. For instance, you might be able to increase the death benefit or decrease the cost of your premiums. However, the amount of interest that the policy pays will rise and fall in tandem with general interest rates.
  • Variable universal life insurance: Similar to universal life, variable universal life insurance policies give you the flexibility of changing your death benefit at any time. Furthermore, you gain greater flexibility in how you invest your funds. The policy may include an increasing death benefit or a level death benefit.
  • Indexed universal life insurance: This is the newest type of permanent life insurance available in the marketplace today. The interest that the policy earns is tied to the performance of an underlying financial benchmark, such as the Standard & Poor’s 500 Index, and protects the policyholder against market drops. When the index rises during a given crediting period, the policy will pay a proportional amount of interest into the cash value. If the index declines, then no interest will be credited, but the cash value will not decline in value. Indexed universal life insurance policies have the same types of flexibility as universal and variable universal policies.

The cost of permanent life insurance

In general, permanent life insurance is more expensive than term life insurance because a payout from the insurer is essentially inevitable. However, your life insurance premium will also vary based on personal factors, such as your age, gender, your overall health, how much coverage you want and whether you smoke or have a risky job or dangerous hobbies. Some insurance providers require a medical exam, especially if you decide to purchase a policy with a higher death benefit. The larger the death benefit, the greater the cost of the premiums that you will pay.

Who should buy permanent life insurance?

Permanent life insurance may be a good option for someone who doesn’t want to worry about renewing their policy down the road, and for those who don’t mind paying extra for lifelong coverage and a cash value account.

Frequently asked questions

Is term life insurance or permanent life insurance better?

The best type of 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.

How does cash value work?

Part of your premium payment goes towards 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 builds value, you may be able to pay your premiums with the money in the account, withdraw it or borrow against it.

Do I need to purchase life insurance for my child?

Thinking about life insurance for your children may not be the most pleasant experience, but it could save yourself or your loved ones from undue financial burden in the event of a tragic event. Parents may choose to purchase child life insurance for financial peace of mind if the unthinkable happens and funeral expenses are incurred unexpectedly. Another reason parents might want to purchase life insurance for their child 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 the future. 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.