Permanent life insurance provides coverage for the policyholder's entire life. It’s life insurance that doesn’t expire. At the same time, it builds cash value. There are two types of permanent life insurance.
This type of policy can be expensive. It can cost $6,000 per year on average for a healthy, non-smoking 30-year-old male to carry $500,000 in coverage. That said, the actual price may vary per person.
Despite the features and benefits, a permanent life insurance policy may not be ideal for everyone. It’s best for those with higher incomes and certain lifetime needs and who are interested in accumulating cash value.
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Key Takeaways
Permanent life insurance is best described as lifetime life insurance. It has no expiration date as long as you pay your premiums. It also builds cash value.
Permanent life insurance policies tend to be expensive. Premiums can be as high as 25 times more than term life insurance.
There are two primary types of permanent life insurance — whole and universal.
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What Is Permanent Life Insurance?
Permanent life insurance refers to a life insurance policy that doesn’t expire. Unlike term life insurance, permanent life insurance coverage lasts the policyholder's entire lifetime. Additionally, it has a cash value that the policyholder can borrow against or withdraw. That said, choosing this type of life insurance means paying a higher premium.
Depending on your needs and circumstances, permanent life insurance may be a good option. Make sure you consider the pros and cons and determine which type of policy suits you.
How Does Permanent Life Insurance Work?
As the name suggests, permanent life insurance doesn’t expire. Unlike term life insurance which ends after a certain period, permanent life insurance lasts your entire lifetime.
Understanding the various qualities of permanent life insurance will help you determine whether it’s a good option. Below are some of its main characteristics.
Lifetime coverage
The policy doesn’t expire as long as you make premium payments. There are three ways for the coverage to end.
First, you may decide to cancel your coverage and collect the cash savings your policy has accumulated.
Second, you may cancel the policy and surrender the cash value in exchange for a reduced death benefit. Some companies allow policyholders to convert to term life insurance.
Third, the policy lapses. It’s possible to reinstate coverage.
High premiums
Given that permanent life insurance also accumulates cash value, premiums tend to be more expensive than term life insurance. The difference in rates can be as high as 25X more.
Premiums for permanent life insurance stay level over time. Unlike term premiums, the rates don’t increase as you age.
Cash value
Part of the premiums goes toward the cash value component. The insurer invests these funds in low-risk investment vehicles. Thus, the value appreciates at a fixed rate.
The cash value is typically tax-deferred. Additionally, you can borrow against it or withdraw the available amount in a time of need.
Dividends
Depending on the policy you choose, you may get dividends. That means the profits earned through the policy are returned directly to you.
You can use the dividend in various ways. You can take it as cash or use it to pay premiums or outstanding loans against the cash value component. You can also use dividends to buy paid-up additions.
Two Types
There are two main types of permanent life insurance.
Whole life insurance is life insurance with permanent coverage and level premiums. Aside from the death benefits, it has a savings account component. Premiums are fixed, and cash value accumulation is guaranteed.
Universal life insurance also has lifetime coverage. It offers a death benefit and cash value. However, it tends to be more flexible. Policyholders can adjust death benefits and have flexible premiums.
Permanent life insurance is only permanent as long as you pay your premiums. That means that despite having lifetime coverage, failure to make the necessary payments could lead to the cancellation of the policy.
You can also opt to cancel or surrender your policy voluntarily. However, you may only receive a reduced cash value. This is called the cash surrender value. The amount you’ll receive is based on the cash value minus surrender fees. If you have outstanding debts against the policy, these will also be deducted.
Types of Permanent Life Insurance
There are two types of permanent life insurance. These are the whole life insurance and universal life insurance. Generally, these two are similar. However, certain characteristics differ. Below are some of the features that make each type of permanent life insurance unique.
Types of Permanent Life Insurance
- Death benefit is guaranteed and fixed
- Fixed premiums
- Guaranteed cash value
- May grow through dividends
- Death benefit is not guaranteed
- Premiums can be adjusted (within limits)
- Cash value can fluctuate
Whole life insurance has two main components — life insurance coverage and a savings account. This type of policy is active your entire life or until a certain age, which is typically 100–120 years old, as long as you’re paying your premiums.
This type of permanent life insurance has fixed premiums, face-value death benefits and tax-free cash value.
There are different types of whole life insurance. The best variation depends on your needs and goals.
Types of Whole Life Insurance
Universal life insurance offers flexibility. It has adjustable premiums and death benefits. Policyholders can increase their death benefit by including the cash value to the proceeds. Cash value growth isn’t guaranteed. It can fluctuate based on the performance of the insurance company’s portfolio.
If you think this type of policy is for you, check the different types of universal life insurance. Compare the features to ensure you’re getting the most appropriate coverage for your needs.
Types of Universal Life Insurance
Universal life insurance tends to be cheaper than whole life insurance. It’s also more flexible. On the other hand, whole life insurance is more stable as it offers guaranteed death benefits. It also has fixed premiums. That said, both offer financial protection. The better option will depend on your specific needs and goals.
How Much Does Permanent Life Insurance Cost?
The cost of permanent life insurance varies per person. That’s because of individual needs and circumstances. On average, a healthy non-smoker 30-year-old male with $500,000 in coverage pays as much as $6,127 annually.
Calculating premiums for permanent life insurance is a bit more complicated than term life insurance. Depending on the policy, rates can be 10–25X more expensive than term life.
Below is a simple comparison for a sample profile to give you an idea how much more expensive permanent life is.
Cost of Permanent Vs. Term Life Insurance
Annual Premium
$317
Annual Premium
$6,127This is 1833% more expensive.
What makes permanent life insurance more expensive than term life insurance is its cash value component. This may vary from person to person. Thus, the premium calculation is more specific and complicated.
Policyholders can borrow against or withdraw the cash value of a permanent life policy to cover unexpected expenses.
Pros & Cons of Permanent Life Insurance
Permanent life insurance offers various benefits. However, it may not always be the best option. Make sure you weigh the pros and cons before purchasing a policy.
Permanent Life Insurance: Pros & Cons
- Lifetime coverage
- Appreciating cash value
- Continuing death benefit
- Option to add riders for available funds while you’re alive
- Tax-free loan against the policy
- Flexibility based on financial situation
- High premiums
- Cash value needs to be monitored
- Possibility of negative returns
- Conservative interest rates
- Detailed stipulations
At first glance, permanent life insurance may seem like an upgrade compared to term life insurance. But it may be better for some individuals and worse for others.
When looking for a policy, it’s smart to shop around. Compare features, conditions and fees. Determine your goals and consider your financial situation. Then, choose the company with the best life insurance that gives the best balance of affordability and quality.
Should You Purchase Permanent Life Insurance?
Permanent life insurance is not optimal for everyone. Generally, it’s best for high-income earners. It’s also important to consider your lifetime needs and goals.
The table below details some reasons that would compel someone to purchase permanent life insurance.
You’re a business owner
Business owners looking for a policy that offers financial protection and earns cash value may consider getting permanent life insurance. The cash value can be used to pay the insurance premiums. It can also be withdrawn or borrowed to finance business expenses.
You’re interested in estate planning
If you’re building an estate plan, you may find permanent life insurance a good investment because it provides another source of funds for your heirs. For instance, the net value of estates may be higher than the amount exempt from taxes at the time of your death. The proceeds of your life insurance policy can be used to cover the expenses.
You’re looking for additional tax-free investment opportunities
The cash value of permanent life insurance is tax-free. Additionally, it grows over time. That makes it an additional investment as you plan for retirement.
In a time of need, you can also choose to withdraw or take out a tax-free loan against your policy's cash value.
You’re the sole provider or are supporting a lifelong dependent
Permanent life insurance can help a sole provider stay afloat during financial hardships. That’s because of the cash value component, which can be taken out as a loan or withdrawn.
Additionally, the death benefits can help cover medical bills or daily expenses after the policyholder’s death. This can help the policyholder’s dependents during hard times.
You may need long-term care
Depending on your needs, you may add different riders. One of these is the long-term care rider. This is a great addition if you’re worried about the possibility of needing long-term care due to a condition or illness.
With this rider, you can access part or all of the plan’s death benefit to cover long-term care expenses.
You have significant debts
Some permanent life insurance policies' flexibility can help pay off debts. You can also reduce your death benefits and save on premiums while taking care of your debts. Additionally, the cash value that grows over time can be withdrawn to settle debts faster.
Given the substantial premium rates that come with permanent life insurance, most people would want to purchase term life insurance. The difference in the cost can be invested. The best term policy for you provides the right coverage based on specific needs. You may opt for permanent life insurance if the reasons above resonate with you.
Compare Life Insurance Rates
Ensure you are getting the best rate for your insurance. Compare quotes from the top insurance companies.
Frequently Asked Questions
Deciding on permanent life insurance requires consideration of various factors. Below are answers to some of the most commonly asked questions about permanent life insurance to help you make an informed decision.
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