What is permanent life insurance?

Permanent life insurance never expires and builds cash value, but it costs more than term life insurance

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When it’s time to get life insurance, you need to understand your options. Both term insurance and permanent life insurance pay death benefits to a beneficiary but with some important differences in cost and objectives.

Unlike term life insurance, a permanent life insurance policy provides coverage for your lifetime. You may hear these referred to as whole life insurance or cash value insurance, and in addition to providing permanent coverage, they also build up cash value you can access.

Since the date of your death is unknown, you need to prepare by getting life insurance if you have loved ones depending on your income. Find out whether permanent life insurance is right for you.


Key insights

Permanent life insurance, unlike term insurance, lasts your entire lifetime.

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Features of permanent life insurance include cash value accumulation and death benefits regardless of your age when you die.

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However, permanent life insurance is more expensive than term insurance and can be more complicated, and you may not need that coverage past a certain age.

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What is a permanent life insurance policy?

Among the types of life insurance, you’ll find permanent life insurance and term life insurance. Permanent life insurance provides coverage for longer than term life insurance (hence the name).

William H. Cooper, a lawyer who frequently handles client cases with life insurance aspects, said, “Permanent life insurance is a type of life insurance policy that remains in effect for the insured's entire life, provided premiums are paid as required.”

The two types of permanent life insurance are whole life insurance and universal life insurance, and several subcategories of universal life insurance are available.

Whole life insurance requires fixed payments throughout your lifetime, though some insurers offer options to pay premiums for a fixed term, such as 10 to 20 years, and then cease making payments without losing coverage. As long as the premiums are up-to-date at the time of the insured person’s death, beneficiaries receive the death benefit.

Universal life insurance is also a form of permanent coverage, with some key differences. Cooper noted, “Universal life insurance provides more flexibility, allowing policyholders to adjust their premiums and death benefits.” The cash value can fluctuate because of interest earned based on variables like the current market or the minimum interest rate.

Permanent life insurance vs term life insurance

Term life insurance and permanent life insurance aren’t identical. Term insurance has one purpose: to pay beneficiaries when you die. Permanent life insurance pays death benefits and lets you accumulate cash value.

Cooper explained, “Unlike term life insurance, which expires after a set period, permanent life insurance also includes a cash value component that grows over time.”

Term life insurance is less expensive and more straightforward. Pay premiums throughout the term, often 10 years to 30 years, and benefits are paid if you die during that period. If you die after that term ends, the insurer doesn’t pay death benefits. But with permanent insurance, your beneficiaries receive a payment whether you die at 65 or 95.

The cash value of a permanent policy grows based on the premiums invested in the market. It comes with several tax advantages.

“Tax benefits of permanent life insurance include tax-deferred growth of cash value, tax-free loans against the policy, and the ability to pass on money to heirs tax-free through the death benefit,” explained Cooper.

Here’s a comparison of the two types of life insurance:

Types of permanent life insurance

Under the umbrella of the permanent types of life insurance, you’ll find unique features, some with more inherent risk than others. Here’s a brief glance at each form of permanent life insurance.

Whole life insurance

Whole life insurance is a policy in which the insurer promises to pay a death benefit whenever you die, regardless of age, if you’ve paid the premiums. It builds up cash value, which you can access for loans, though that reduces the death benefit. Premiums may be required for your lifetime or for a set period of years, depending on the policy.

Cooper said, “Whole life insurance offers a fixed premium and a guaranteed cash value growth, making it a predictable policy choice.” The insurance company sets the rate of growth for cash value, so it doesn’t fluctuate due to external factors.

Universal life insurance

With a universal life insurance policy, you can adjust your premiums and death benefits as needed. You still receive lifetime coverage, but the amount of the death benefit will vary if you have adjusted your payments. Cooper also explains that market or interest rate fluctuations can cause your cash value to earn varying levels of interest.

Variable universal life insurance

A variable universal life insurance policy is like a universal life insurance policy, but with the option to invest the cash value in a range of investment options, says Cooper. This requires careful attention and can be risky because the cash value and the death benefit are impacted by how well or how poorly these investments perform in the market.

Indexed universal life insurance

An indexed universal life insurance policy links your cash value growth to an index such as the S&P 500. As Cooper notes, your maximum return is capped and the account won’t permit loss of cash value. It’s a way of getting market exposure with lower risk than a variable universal life policy.

How much does permanent life insurance cost?

As with any insurance company product, the cost depends on a number of factors, so you need to get multiple estimates from different insurers. Cooper notes that in addition to policy features, other factors impacting the cost of permanent life insurance include the insured person’s age and health. Of course, the amount of coverage affects the premiums you pay as well.

Cooper said, “Cost-wise, permanent life insurance is generally more expensive than term insurance due to the cash value accumulation and the lifelong coverage.” Keep this in mind when making your decisions, as you can get a more affordable term insurance policy for straightforward protection.

If you’re a man, your permanent life insurance premiums will likely be higher than if you’re a woman (assuming other factors are equivalent). Health issues will impact your premiums, as will your status as a smoker or nonsmoker.

For example, Policygenius estimates a 40-year-old healthy, nonsmoking male will pay $706 per month for $500,000 in coverage. A 40-year-old healthy, nonsmoking female will pay $588 for the same coverage.

Pros and cons of permanent life insurance

For many people, term life insurance is preferable to permanent life insurance, as it’s more affordable and you may simply not need coverage beyond 20 or 30 years.

When weighing the pros and cons of permanent life insurance, consider them in light of what you need your policy to do for you and what you can afford.

As Cooper states, permanent life insurance has many pros, such as lifelong coverage and cash value. “However, these policies are more complex and costly than term life insurance. They require a larger financial commitment and can be less transparent, given their investment components.”

Pros

  • Lifetime coverage if premiums are paid
  • Cash value component
  • Tax-free growth of cash value
  • Tax-free loans against your policy

Cons

  • Higher premiums than for term insurance
  • Borrowing from cash value reduces the death benefit
  • No benefits paid if you lapse on premiums
  • Less need for death benefit after a certain age
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FAQ

Can you cash out permanent life insurance?

You can take out a cash loan from a permanent life insurance policy (insurers typically have limits on how much of your cash value you can access), which will reduce the future death benefit if you don’t repay the loan. You also can cash out your permanent life insurance policy by withdrawing all of the cash value accumulated, which cancels your coverage.

How long does permanent life insurance last?

Provided that you keep current on premiums and any other policy terms, permanent life insurance lasts for your entire lifetime.

Are there tax benefits to permanent life insurance?

Yes. The cash value of the policy grows tax-free and any loans you may take out against the policy are tax-free. Plus, the death benefit paid to your heirs is not taxable.

Bottom line

Most experts recommend term life insurance for most people because it’s more affordable and offers valuable protection to your dependents. But permanent life insurance may have a place in your plans as well.

If you want to build up cash value and be assured of leaving benefits to your heirs regardless of when you die, permanent life insurance can be a good option. However, universal and variable universal life insurance are riskier and not ideal if you take a hands-off approach to coverage.

Above all, make sure that you make plans to provide financially for your loved ones in the event of your death, especially while they’re reliant on your income.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. New York State Department of Financial Services, “Types of Life Insurance Policies.” Accessed May 9, 2024.
  2. Policygenius, “Average whole life insurance rates.” Accessed May 9, 2024.
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