What Is Permanent Life Insurance? (And Should You Use It?)Learn about permanent life insurance and find out if it's right for you with our guide.
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A permanent life policy is an excellent choice for people who want to get comprehensive coverage for the rest of their lives.
Because there are different permanent life insurance plans out there, it’s essential to understand each type’s benefits, drawbacks, and other factors before you decide.
You’ll also want to consider whether a permanent life cover is right for you, or if a different type of life plan might be a better choice.
This article will help you understand what permanent life coverage is, who should buy it, what you can do with it, and other things you should consider when choosing life insurance.
What Is Permanent Life Insurance?
Permanent insurance plans cover beneficiaries for their entire life and do not expire. As long as a policyholder pays their premiums, their permanent life contract will continue until they die.
Once this happens, their insurance company will pay a death benefit to the beneficiaries stated in the contract.
What Is a Death Benefit?
A death benefit is sometimes also known as the face value of an insurance contract. This is the amount of money an insurance company will pay to beneficiaries when the policyholder dies.
For example, a $1,000,000 whole life plan has a death benefit or face value of one million dollars.
You pay premiums for a predefined number of years. Your premium payments are locked in when you take out a permanent life insurance plan, so they won’t increase as you get older. Once you’ve paid all your premiums, you won’t have any more costs but will still be covered.
There are many different permanent life insurance policies, each with benefits and costs. One of the most significant benefits these plans share is their cash value.
How Does Permanent Life Insurance Work?
You pay a monthly or annual premium when you take out a permanent life policy.
When you take out your plan, you choose a beneficiary or beneficiaries who will receive the death benefit.
You can split the cash between people as you choose. You can also designate contingent or secondary beneficiaries as a backup.
What Is a Contingent Beneficiary?
When a person takes out a life insurance policy, they have to say who will receive the death benefit. These people are called beneficiaries because they will benefit when the policyholder dies.
A policyholder must state their primary beneficiary. This is the person who the policyholder wants their death benefit to go towards.
However, there are situations when a policyholder might outlive their primary beneficiary.
This is why policyholders must also state other people, known as the secondary or contingent beneficiaries.
These are people who will receive the death benefit if the policyholder’s primary beneficiary has died.
Each time you pay, part of the premium goes to the insurer. This covers the costs of the insurance and administration. The remaining money is left to earn interest in your cash-value account—we’ll cover this later in the article.
When you pass away, your beneficiaries receive the death benefit and the cash value goes to the insurer unless you choose a plan that pays out both amounts.
Be Aware of Maturity Dates
While permanent life insurance is marketed as lasting for your entire lifetime, some plans have maturity dates.
These are typically between the ages of 95 and 121. If a policyholder reaches this milestone, their policy will pay out on their birthday.
What Is Cash Value in a Permanent Life Insurance Plan?
Cash value is a cash buildup or asset that policyholders contribute towards on top of their premiums. These are known as living benefits.
What Is a Living Benefit?
A living benefit is an additional feature in a life insurance contract that allows the policyholder to benefit while alive.
For example, if a person pays additional money towards their life insurance policy, that extra money will be put in a cash value account.
The money in this account gathers interest, which means it can rise in value over time. And it is tax-deferred, which means you’ll only pay taxes on it once you withdraw the funds from your policy.
A cash value account is an asset. This means that after policyholders have saved enough, they can use their cash value to:
✅ Borrow money and use their cash value amount as security.
✅ Withdraw money from their cash amount.
✅ Pay their permanent life insurance premiums.
For example, a person can apply for a $100,000 loan and put their cash value account down as an asset in the loan application. Or they can withdraw money from their account if they need cash urgently or have an emergency.
However, there are downsides as well. Keep these points in mind about cash value accounts:
Most plans won’t pay the policy’s cash value to beneficiaries when a policyholder passes away. Instead, it reverts to the insurance company.
Any withdrawals or loans outstanding will reduce the death benefit amount the insurance company pays to beneficiaries.
It is possible to buy a plan that will pay out both the death benefit and the cash value. But premiums will be higher.
Cash Value Example
Imagine a policy with a $250,000 death benefit and a $25,000 built-up cash value.
If the policyholder hasn’t touched the cash, the beneficiaries will receive $250,000.
But if the policyholder has taken out loans on the cash value worth $15,000 this amount will be subtracted from the death benefit, leaving the beneficiaries with $235,000.
Permanent Life Insurance vs. Term Life Insurance
The difference between permanent life insurance and term life insurance policies is that the former covers you for your entire life, while the latter only covers you for the duration of your plan.
This means if you pass away after your term insurance plan ends, your beneficiaries won’t receive a death benefit. You can take out another plan once your original plan ends, although the premiums may be higher as you’ll be older.
Another difference is cost: term life insurance plans are cheaper than permanent life insurance plans. This is because there’s a chance the insurance company won’t have to pay out at all.
Why Would I Need a Permanent Life Insurance Policy?
Multiple factors influence whether you will benefit from permanent life insurance.
It’s typically a good choice if you can afford the premiums and you want to guarantee that your dependents receive a cash payout when you die. In other circumstances, a whole term plan may be more suitable.
If you just want to provide a safety net to your children while they can’t provide for themselves, a term life insurance plan is usually sufficient. You can take out a policy that will last until your children become adults and earn their own money.
But permanent life insurance policies are suitable in other circumstances.
If you have considerable assets and want to avoid paying inheritance taxes
If you wish to access a tax-deferred investment
If you want a guaranteed way to provide dependents with a death benefit
If you have maxed out your other retirement benefits
Types of Permanent Life Insurance
Nowadays, people can get different kinds of permanent life insurance plans. There are three main categories of permanent life insurance.
While each type will last for your entire life, some differences make them suitable for different kinds of policyholders, including:
The amount of coverage you want
Flexibility around changing your plan
Your appetite for risk
The amount you want to pay each month
Your financial obligations
There are three main kinds of permanent life insurance: whole life, universal life, and other types of life cover.
Whole Life Insurance
Whole life insurance plans are sometimes known as traditional life insurance and have fixed premiums and a death benefit amount.
With these types of plans, policyholders can add additional money on top of their premiums into their policy’s cash value account, which will gain interest at a guaranteed rate offered by their insurance company.
Whole life plans do not let policyholders change their terms of coverage, premiums costs, or their policy’s death benefit.
Universal Life Insurance
Universal life plans are more flexible than whole life plans in terms of making changes to coverage and costs.
These life insurance plans have a minimum and maximum monthly premium and let policyholders pay any amount between these two levels. Policyholders can also adjust their death benefit amounts and payment terms.
If you pay more than your maximum premium, the additional money is placed in an account that will grow at different rates depending on the type of universal life plan you have.
People can buy three types of universal life plans: basic, indexed, and variable. The difference between these plans is how they invest your cash value amount.
Basic Universal Life Insurance
A policyholder’s cash value account will grow at a guaranteed rate with basic universal life cover, much like it would if they had a whole life plan.
The cash value of these plans is not tied to market rates, which means the amount will grow steadily over time.
For example, a basic universal life plan could offer an interest rate of 6%, which means that a person with $10,000 saved in their policy can expect their money to grow by that amount each year.
Variable Universal Life Insurance
Variable life insurance policies offer policyholders the ability to invest the cash value in the insurance company’s range of investment accounts. The return on investment will vary depending on how your investment performs.
These plans are considered the riskiest option of the three types of universal life insurance because cash value amounts are invested in various financial instruments, such as stocks, bonds, and mutual funds.
For example, a person who has a $20,000 cash value in a variable life policy might get great returns on their money and grow their investment by 20%. However, if the investments do poorly they might also lose money.
In some cases, people have lost all of their money, so it’s essential to choose the right life insurance company if this is the route you would like to take. The plan may have a minimum death benefit that ensures beneficiaries receive payment even if your investments do poorly.
Indexed Universal Life Insurance
Indexed universal life plans have a moderate risk profile between variable and basic universal policies.
A policyholder’s money is invested in index funds such as the Nasdaq 100 and S&P 500, which don’t change as much as individual stocks. For example, a cash value of $20,000 invested in the Nasdaq 100 might:
Grow very well like it did in 2020 (+47.58%) = $29,516
Grow well as it did in 2014 (+17.94%) = $23,588
Lose a little bit like it did in 2018 (-1.04%) = $19,792
Lose a lot like it did in 2008. (-41.89%) = $11,622
Case Study: Whole Life vs. Universal Life
George is a 46-year-old HR manager in Cincinnati who purchased a whole life plan worth $450,000 ten years ago with a local insurance company.
According to the terms of his plan, George needs to pay a premium of $550 each month. For the past ten years he’s been able to pay this, but recently he’s run into financial trouble.
Because George has a whole life plan, he still needs to cover his monthly premiums to keep his life insurance policy.
He won’t be able to lower his death benefit or pay a lower premium to reduce his costs while he sorts out his finances.
However, if he had paid additional money over the years he would be able to use his cash value account to cover his premiums for a short time.
If George had a universal life insurance plan and was in the same situation, he would have more flexibility around his costs.
For example, he would have to pay a minimum and maximum amount each month for his universal life plan, which means he could pay the minimum amount until he sorted out his finances. He could also lower his death benefit to reduce his monthly premiums.
Other Types of Permanent Life Cover
Here are some other kinds of permanent life insurance plans you can consider. These permanent life insurance policies work similarly to the plans we’ve covered already but differ in the amounts they cover and their purpose.
Final Expense Insurance
Final expense insurance is a type of whole life insurance that offers a guaranteed payout designed to cover burials and funeral costs, although beneficiaries can use the money for anything.
The benefit is that these policies are easy to qualify for even if you are in poor health. They also usually offer smaller coverage amounts than universal and whole life insurance plans, making them more affordable.
Survivorship policies cover two policyholders under one policy and are usually purchased by couples. The payout only happens when both policyholders die.
Survivorship policies are suitable for people who have significant assets and want to get a higher face value than they would get on their own.
They are useful for maintaining generational wealth because they help families avoid high taxes on estate and inheritance amounts.
For example, let’s say a woman has inherited money and doesn’t work, and her husband has a mid-level management position. The couple can purchase a survivorship policy to pool their assets into a policy that gives them a larger insurance amount than they would individually qualify for.
How Much Does Permanent Life Insurance Cost?
Permanent life insurance policies have a guaranteed payment, making the premiums more expensive than term life insurance plans.
The exact amount you pay depends on multiple factors, including:
Your Death Benefit Amount
A plan with death benefits of $150,000 will naturally have far lower premiums than one with a death benefit of $500,000.
How Long You Pay For
How long you pay will also make a difference to your premium. Longer payment terms not only split the cost of the death benefit into more payments, but they also have more time to earn interest and grow in value.
Your Current Health
Insurers may require a physical exam to assess your mortality risk, which will affect premiums. You’ll pay less if you’re healthier, as you’ll be considered likely to live longer and therefore pay premiums for longer.
Women statistically live longer than men, so their premiums are slightly lower than the equivalent plan for a man.
Your Cash Value
Some plans let you use your built-up cash or saving component to pay your premiums. This can reduce the amount you pay out of pocket in later life.
Example of Permanent Life Cover Premium Costs
Here are three examples of costs for a simplified whole life plan with coverage of $250,000 and fixed payments until age 65.
In Florida, a thirty-year-old male without preexisting health conditions who doesn’t smoke and has a healthy weight would pay $204.77 per month.
A fifty-year-old male in Florida without preexisting health conditions who doesn’t smoke and has a healthy weight would pay $341.02 per month.
A fifty-year-old female in Florida without preexisting health conditions who doesn’t smoke and has a healthy weight would pay $299.98 per month.
Where Can I Learn More about Permanent Life Insurance and Life Insurance?
If you’re interested in learning more about a permanent life policy or other types of life cover, visit our Life Insurance Hub to read our latest articles, guides, and reviews.
Our team can help you with your life insurance questions and find you the best term and permanent plans in your state. If you would like to speak to an agent, feel free to reach us on 1-888-912-2132 or send an email to firstname.lastname@example.org.