What Is Permanent Life Insurance?
Permanent life insurance issues a cash payout to your beneficiaries when you die, so long as you pay your premiums. Permanent life insurance policies have a cash value component that functions as an interest-earning savings account or an investment account, allowing you to invest a portion of your premiums in the securities market. You may borrow against the accumulated cash value as a loan or cash it out early depending on the insurer.
Permanent life insurance is often contrasted with term life insurance, which offers limited duration coverage and has no cash value component.
While permanent life insurance offers an array of advantages, it isn't ideal for everybody. Learn more about permanent life insurance, its costs and whether it's right for you.
How Does Permanent Life Insurance Work?
Under any life insurance policy, a cash payout (also called a death benefit) is issued to the beneficiaries if the insured dies. Beneficiaries are the designated individuals who receive the money in the event of your death — typically a family member, estate, charity or a combination of different parties. The term "lifelong coverage" is not entirely accurate. Some insurers set the policy term to end at age 121 but most times, the insured dies well before that age.
Premiums on a permanent life insurance policy are level, which means that they will not change over the coverage period. For example, your life insurance monthly premium will be $30 at 20 years and the same at 70 years old.
Permanent life insurance policies have a cash value component. Each time you pay your premium, a portion of your payment is deposited in a tax-deferred savings or investment account. Depending on your insurer, you may borrow against the accumulated equity to finance major expenses, like college tuition, a wedding or a home down payment. Keep in mind that you must repay the loan plus interest or the outstanding balance will be deducted from your policy's death benefits, resulting in a smaller cash payout to your beneficiaries after you die.
Insurers may allow you to cash out your policy by surrendering your policy. While you may withdraw the full cash value, you are effectively canceling the policy and your beneficiaries will not receive a cash payout when you die. You will only be taxed on the amount over your policy basis.
Types of Permanent Life Insurance
There are four primary categories under permanent life insurance: whole, universal, variable and indexed universal.
Whole Life Insurance
Whole life insurance offers lifelong coverage and accumulates cash value as you continue paying premiums. Rates are level, or do not change, throughout the life of the policy. Cash value typically earns interest at a guaranteed interest rate declared by the insurer (e.g., 4% annually).
Universal Life insurance
Universal life insurance offers greater flexibility over your death benefits and premiums compared to a whole life policy. Policyholders can increase or decrease their death benefit and use accumulated cash value to pay for premiums. Similar to whole life policies, the cash value component earns interest at a declared interest rate.
With a variable life policy, policyholders have greater control over how their premiums are invested. Instead of a savings account, variable life functions more similarly to an investment vehicle with policyholders choosing which stocks and bonds to invest in.
A variable life policy has more growth potential than a whole life policy since a booming market can contribute to a higher rate of return. However, policyholders may lose money if their investments perform poorly. The policy would be surrendered if the accumulated cash value can no longer pay for premiums and various fees for management and investing associated with this type of permanent life policy.
An indexed universal policy functions similarly to a universal policy except that the rate of return is tied to the performance of a stock market index (e.g., S&P 500 index) instead of a guaranteed rate declared by the insurer. Similar to a variable life policy, policyholders may receive a higher or lower rate of return depending on how the underlying stock market index performs.
How Much Does Permanent Life Insurance Cost?
The cost of permanent life insurance is heavily determined by your age. For example, you may see rates for a permanent life insurance policy as low as $14 per month for a child whole life policy and as high as $217 per month for a 50-year-old. Here is an example of how whole life insurance rates would vary for a male aged 50 to 75.
Monthly Premium for $100,000 of Coverage
Source: Lincoln Heritage Life Insurance Company
Your age and health are among the biggest determinants of your life insurance rates. Generally, older people have a higher mortality rate and tend to also have more health concerns than younger people, thereby increasing the likelihood of death benefits being paid out That is why pre-existing and chronic health problems are considered when pricing a policy as well.
Your life insurer may also consider your lifestyle and daily habits. Smoking or drinking regularly can result in higher premiums. Even certain dangerous recreational activities, like rock climbing or scuba diving, may increase your life insurance premiums. Keep in mind that lying on your life insurance application can void your death benefits.
Life premiums may also be higher for males, who statistically have a higher mortality rate than females.
Pros and Cons of Permanent Life Insurance
Builds cash value
Lock in low rates for children
Lifelong coverage: Your beneficiaries are entitled to a death benefit payout in the event of your death, so long as you stay on top of your premium payments and policy fees.
Builds cash value: Your life insurance policy builds cash value as you continue paying your premium payments. Your insurer may allow you to borrow against the equity in the form of a loan to be used when you need it (paying for a child's education or wedding, for instance).
Fixed rates: Your life insurance premiums remain the same amount whether you're 20 years old or 80 years. This predictability can make it easy for long-term budgeting.
Lock in low rates for children: If you buy permanent life insurance for your child before they turn 18 years old, you can lock in extremely affordable rates that remain the same until they die (so long as premiums are maintained).
Higher cost: Permanent life insurance policies are typically higher-cost than term life policies due to their unique perks, such as lifelong coverage and having a cash value component.
Fees: Some permanent life policies, like a variable life policy, charge additional administration and investment management fees, which can drive up the cost.
Permanent vs. Term Life Insurance
Permanent life insurance has several advantages, like lifelong coverage and a cash value component, but a term life policy may be better suited for certain individuals. We highlighted key differences below to help you better decide.
5-30 years or a specific age (e.g. age 65)
Builds cash value over time
No cash value component
Typically more expensive than term life
Typically less expensive than permanent life
Stays the same
Can increase with each tern renewal
Differences in Coverage Period
Permanent life insurance pays death benefits at any age (usually up to 121) as long as you pay your premium payments. Term life policies typically have fixed coverage periods up to 30 years or until the insured reaches a certain age, like 65. Some insurers even offer short-term life insurance policies as short as one year.
Differences in Cash Value
Permanent life insurance policies have a cash value component that stores a portion of your premium payments in a savings or investment account. As you maintain your premiums, your life policy's cash value slowly accumulates over time. Eventually, you may be able to borrow against the accumulated cash value in the form of a loan. Some insurers allow you to cash out early by canceling the policy (and surrendering your death benefits).
Term life policies do not accumulate cash value.
Differences in Cost
Permanent life policies offer a slew of benefits but often come at a higher cost. Term life insurance may have fixed periods but are typically cheaper than a permanent life policy.
Differences in Premiums
Whatever rate you received when you opened a permanent life insurance policy will remain the same for the remainder of your coverage. The premium you paid at 20 years old will usually be the same at age 80.
If you decide to renew your term life insurance policy once the term expires, you can expect to pay a higher rate that aligns with your new age.
Which Should I Pick?
Term life insurance is ideal if you need coverage for a specific purpose and over a certain period. For example, you may buy a 30-year term life policy around the same time you take out a 30-year mortgage loan. If you die within the coverage period, then the death benefits could be used to pay off some or all of the mortgage loan — potentially freeing this financial burden from your family members.
A whole life policy is better suited for those who want to build cash value. If you buy a permanent life insurance policy for your child while they are young, then the cash value could be used as a savings vehicle for college, a wedding or even a down payment on a home.
Shopping for a Life Insurance Policy?
Permanent life insurance is ideal if you need lifelong coverage and want your premiums to build cash value over time. If you want to ensure your family members have some financial assistance in the event of your death, then choosing the right insurance company is essential. Based on your answers to our quick questionnaire, SmartFinancial can match you with a life insurance policy that meets your coverage needs and budget. Receive your free quotes by entering your zip code below and answering a few questions.