A majority of adults aren’t familiar with nuanced life insurance, so questions like “What is permanent life insurance, and what does it cover?” are common.
Life insurance is an agreement that provides a tax-free cash benefit when a policyholder dies. A permanent life insurance policy lasts for as long as the policyholder is alive and making payments on time.
Permanent contracts also have a tax-deferred savings element called cash value. A portion of policyholder premiums is placed in an account for the cash value to grow over time. The policyholder can borrow funds from this account while living.
Learn more about how permanent policies work and the different types of life insurance available below.
How Does Permanent Life Insurance Work?
Permanent life insurance policies provide lifelong coverage regardless of how long someone lives. As long as the premiums are paid, the policy remains. Once the policyholder dies, beneficiaries receive the policy cash out to cover burial expenses, debt, inheritance, and other needs.
Before death, the policyholder’s premiums are split three ways to cover the insurer’s costs, contribute to the death benefit, and contribute to a cash value. The cash value grows tax-deferred with a contracted interest rate (some policies earn no interest). The policyholder has access to these funds via:
- Surrender: Cancel the policy and receive the cash value minus any fees.
- Loans: Take out a loan with a fixed or variable interest rate to repay at another time, or deduct the expense from your death benefit.
- Premium payments: Use the existing cash value to cover your regular premium payments.
Permanent policies premium costs vary depending on:
- Gender
- Age
- Policy type
- Health (for simplified no-waiting period plans)
- Tobacco use
- Coverage
Once the contract is in effect, premiums won’t change in most cases. Though, some policies do allow policyholders to adjust their premiums if necessary.
- Cash value growth
- Lifelong coverage
- Death benefit
- More expensive than term life insurance
Types Of Permanent Insurance
There are two primary types of permanent life insurance: whole and universal. The differences are between the policies’ costs and guarantees provided.
Whole life insurance has fixed premiums for the lifetime of the policy. It provides a guaranteed death benefit and cash value growth with a fixed interest rate.
Universal life insurance typically guarantees a death benefit and consistent premiums, but either are flexible based on the policyholder’s needs. Underperforming investments or significant cash withdrawals can affect the premiums required and death benefit.
| Whole | Universal | |
|---|---|---|
| Cost | $$$ | $$ |
| Premiums | Fixed | Flexible |
| Death Benefits | Guaranteed | Flexible |
| Cash Value | Guaranteed | Potential |
Universal life insurance also has a variable policy available. The cash value of variable policies is invested in assets to generate more substantial growth, though there’s also a higher risk of loss.
Permanent vs. Term Life Insurance
Both term and permanent life insurance policies provide a tax-free cash benefit after death, but the life and some benefits of these policies vary.
| Permanent Life Insurance | Term Life Insurance |
|---|---|
| • Tax-advantaged investment • Lifetime coverage • Higher premiums • Protected coverage in case of illness | • Lower premiums • Set coverage term defined by contract • Renewal may be rejected because of health |
Permanent life insurance policies are valid as long as the policyholder is alive and making timely payments. Term life contracts name a set amount of time the policy is valid — typically between 10 and 30 years.
The biggest benefit of term life insurance is cost. Premiums are lower because the policy is temporary, and a payout isn’t guaranteed. If a term life policyholder dies before their policy takes effect or after it expires, their beneficiaries don’t receive any cash.
One term policy benefit is that the contract may be renewed or converted into a permanent life insurance policy. However, the insurance provider can reject renewal based on health, age, and other factors.
It can be argued that permanent life insurance is a better option for complete protection because an established policy can’t be rejected or terminated due to a new sudden illness.
It also offers a tax-advantaged investment component that term policies don’t have, so your cash value can grow. In some cases, policyholders can access this cash while living to use it as they like.
Frequently Asked Questions
Permanent life insurance has many advantages, the largest being:
- Lifetime coverage
- Investment opportunities
The cash value of permanent policies grows via premium contributions and an interest rate. Variable policies may invest the value for even larger growth, with a higher risk.
This offers a larger cash payout at death and also provides access to cash while the policyholder is alive to pay debt, provide income, or even cover the policy’s premiums.
Each type of life insurance meets different needs, so neither is necessarily better.
Permanent life insurance is best for lifelong needs such estate planning, funeral costs or and financial growth. It’s also ideal if you want long-term coverage and expect your health may decline since it locks in your premium, and your contract can’t be canceled because of your health or age.
Term insurance is better for short-term needs, like income replacement or debts like a mortgage. It’s also a popular choice for parents who want to protect their children in case of an accident. The low-cost premiums are attractive, too.
Many families have both permanent and term life insurance contracts to meet all of their estate and financial planning needs. If you’re unsure which is right for you, chat with your insurance agent or a certified financial planner to explore your options.
Whole life insurance is a type of permanent policy. So, all whole life insurance is permanent life insurance, but not all permanent life insurance is whole life insurance.
Whole and universal life insurance are the two types of permanent coverage to know. Whole life insurance is more expensive, but it guarantees cash value growth and a death benefit. Universal life insurance is more flexible, so policyholders can adjust their premiums, but this can impact their death benefit.
Sooner is usually better, depending on your life goals and trajectory. One case for securing permanent life insurance earlier is that you can lock in a low premium rate while you’re young and healthier than you may be in 10 or 20 years.
The other important factor is that permanent policy values grow, and the longer you have the policy, the larger your cash value will be. Since policyholders can access this cash anytime, this can help you make a down payment on a house or even save for a child’s education.
Rest Easy With Permanent Life Insurance
Knowing what permanent life insurance is and how it’s different from term life can be confusing if you’ve never looked into it before. The clearest difference is that permanent policies last the life of a policyholder (as long as payments are made on time), while term policies are temporary.
Both are valuable contracts that help you cover financial obligations, like burial costs and debt payments, by providing a cash value to beneficiaries to apply as they see fit.
Compare insurance policies and get a quote today to secure coverage for you and your family.
