Permanent life insurance is designed to offer lifetime coverage. It can also accrue a cash value over time. This coverage differs from term life insurance, which is designed to cover you for a set period of time, such as five, 10, or 20 years. However, this type of life insurance isn't the right option for everyone.
If you're looking for permanent life insurance coverage, an independent insurance agent can help you find the right policy. They'll get you set up with life insurance coverage that will last your whole life. But first, you can find out more about this coverage using our guide to some of the web's most frequently asked questions about permanent life insurance.
Key Takeaways - Permanent Life Insurance FAQs
- Permanent life insurance is a type of coverage designed to cover you for your entire life.
- Unlike term life insurance, permanent life insurance policies accrue a cash value over time.
- You have the option to borrow against or take out a loan from your policy if you need cash early.
- Working with an independent insurance agent is highly recommended, as they can shop and compare policy options from many different carriers and tailor a plan to you.
Table of Contents
Q.What Is Permanent Life Insurance?
Q.What Does Permanent Life Insurance Cover?
Q.How Does Permanent Life Insurance Work?
Q.How Much Does Permanent Life Insurance Cost?
Q.Is Permanent Life Insurance Taxable?
Q.How to Buy Permanent Life Insurance
Q.When to Get Permanent Life Insurance
Q.Is Permanent Life Insurance an Asset?
Q.Why Is Permanent Life Insurance Important?
What Is Permanent Life Insurance?
Permanent life insurance is a form of life insurance that covers you for life and offers your family protection from financial hardship. Additionally, a permanent life insurance policy has a cash value accumulation feature that grows steadily over time.
In some cases, you can borrow or withdraw a portion of the cash value and use those funds for living expenses or to pay your premiums. Permanent life insurance policies also offer a number of tax advantages.
What Does Permanent Life Insurance Cover?
There are three main types of permanent life insurance policies, which include:
- Whole life insurance
- Universal life insurance
- Variable life insurance
Whole Life Insurance
A whole life policy remains in effect for a person’s lifetime, as long as premiums are paid. Depending on the whole life insurance policy you buy, you will have several premium options, including:
- Paying your premiums monthly for the life of the policy
- Paying your premium in one lump sum payment when you buy the policy
- Paying your premiums for a set number of years
A whole life insurance policy consists of both a death benefit and a cash value accumulation component. The cash value grows regardless of whether the insurance company performs well on its investments.
You can use the cash value, or savings portion, as collateral; you can withdraw or borrow against it. You also have the option of buying the policy at a ”surrender value,” which means you can cancel the policy for a single cash payment.
Universal Life Insurance
Universal life insurance is very similar to a whole life policy, except that it has additional flexibility. A universal life insurance policy has the following features:
- A death benefit with two options:
- Maintain the same death benefit from year to year
- Set the death benefit equal to the original amount plus the cash value accumulation
- Allows you to decide how much of your premium will go towards insurance, and how much will go into the savings portion
- Allows you to earn higher interest on your cash value accumulation when inflation rates are high, and the minimum guaranteed interest rate when inflation rates are lower
Variable Life Insurance
Variable life insurance is a lifetime policy with these features:
- Guaranteed minimum death benefit
- Allows you to select which performance portfolio you want to invest your money in, such as opting to invest the savings portion of the premium into stocks, bonds, or a money market fund. However, the performance of this cash-saving feature is dependent on how well the investment performs.
How Does Permanent Life Insurance Work?
How permanent life insurance works is determined by the premium you pay. The premium is allocated by the life insurance company in three ways:
- A portion of the premium is used for the cost of the life insurance or the death benefits.
- A portion of the premium goes towards the administrative cost for managing your policy.
- The final portion of the premium goes towards the savings or cash value accumulation portion of your policy.
The premium you pay can remain the same and is guaranteed for the life of the insurance policy, or it can be more flexible. The cash value increases because of the regular payment of your premium and also because of interest or investment earnings.
How Much Does Permanent Life Insurance Cost?
Your permanent life insurance cost can depend on the following factors:
- The death benefit you choose
- Your age
- Your health
- The type of policy you choose
- The coverage amount you choose
Permanent life insurance premiums are less expensive to buy when you are younger and become increasingly more expensive as you age. The life insurance company determines how much your permanent life insurance premium will cost.
Premiums can be “locked in” and will remain the same for the life of the policy, such as in a whole life policy. They can also be something you can alter, as in a universal life insurance policy.
To determine how much permanent life insurance you need, you can use this formula:
Death benefits required + income replacement required – investments and retirement savings = life insurance needs.
Let’s look at the elements of this formula in depth:
Determine the death benefits needed: Add up your anticipated financial requirements at the time of your passing, such as end-of-life and funeral expenses, your mortgage and outstanding debts, college tuition for your children, and other benefits you may want.
Choose the amount of income to replace: Determine how much replacement income your family will need if you die unexpectedly. Consider how you make per month or how much of your existing salary your survivors will need per month, and multiply by 12 for a yearly projection.
Assess financial assets available: Finally, deduct your existing assets from the above two components. Your financial assets would include any life insurance plans already in place, your retirement plans, and other savings or investments.
Overall, the cost of permanent life insurance can be much higher than term life policies because permanent life coverage offers living benefits. However, permanent life insurance can prove to be a better value over time.
Is Permanent Life Insurance Taxable?
Permanent life insurance is not taxable until you withdraw funds from the cash portion of the policy. If you take out a “loan” against the policy, the amount you borrow is not taxable. Death benefits paid out to your named beneficiary are exempt from both income tax and estate taxes.
How to Buy Permanent Life Insurance
When choosing your life insurance policy, your first step is to determine how much permanent life insurance you need. An independent insurance agent can help you find the best permanent life insurance policy by shopping and comparing options from several different carriers in your area. Your agent can also help you keep your financial goals at the forefront of this process and offer professional advice when comparing policies and rates.
When to Get Permanent Life Insurance
There are a number of reasons why a person might choose to get permanent life insurance. Because permanent life insurance is a lifelong policy, a good time to purchase life insurance is when you are considering financial planning and ways to create financial security in your retirement years. You may also choose permanent life insurance when you are looking for a long-term savings and investment tool.
A good time to purchase permanent life insurance is when you are young and your rates are extremely low. If you’re older, especially if you are in your fifties or over age 65, you can still buy a permanent policy as an estate planning vehicle or to set up a trust.
Is Permanent Life Insurance an Asset?
The answer depends on an individual's needs and goals. Some people prefer to get term life insurance and invest the difference they would have paid into a permanent life insurance policy in other ways. Others like the fact that permanent life insurance is designed to be an asset that grows in value.
People who are evaluating life insurance policies often ask, “Is permanent life insurance a good investment?” You can use whole life or universal life insurance as a long-term investment vehicle that provides continuous, stable growth along with tax advantages and a death benefit. A permanent life insurance policy provides liquidity, as you can borrow against it or withdraw funds.
Why Is Permanent Life Insurance Important?
Permanent life insurance is important because it allows you to set money aside for your golden years and can provide financial stability for a surviving spouse or dependents after you pass.
Many people choose the less expensive option, term life insurance, promising themselves they will save and invest the money they would otherwise have spent buying a whole life or universal life insurance policy. The potential downside is that you may not actively invest money or actively manage those investments. Even if you do set money aside and invest it, you’re not guaranteed a profit due to market volatility.
The other feature of permanent life insurance that many people like is that, unlike term life, it pays a death benefit no matter what. By contrast, term policies often lapse without the insurance company paying out a claim, and when you go to renew your term insurance, it can be significantly more expensive to renew, especially if you have health concerns.
How Does the Cash Value Component Work?
Permanent insurance builds up a cash value over time and continues to achieve steady growth over the life span of the policy. You can also borrow the funds or take a loan out against the cash accumulation portion, although this can reduce the amount of death benefits payable from the policy.
There can be pros and cons to borrowing from your life insurance policy's cash value. You can use the money for current needs, such as to pay off debt. However, you'll be left with less money accumulated at the end of the policy unless you replace it. An independent insurance agent can further advise on whether you should borrow against your cash value life insurance.
Who Should Consider Permanent Life Insurance?
Long-term financial planners, estate planners, high-income earners, and business owners often benefit the most from permanent life insurance policies vs. term life insurance or other types of coverage. When asking who needs permanent life insurance, it's helpful to understand the ideal candidates for this type of coverage.
It's also typically recommended to sign up for permanent life insurance policies when you're younger to lock in a lower premium rate. You can ask an independent insurance agent to explain permanent life insurance benefits to determine if this type of policy is right for you.
Permanent Life Insurance vs. Term Life Insurance
It can be helpful to understand the differences between term and permanent life insurance when selecting your policy. Use the table below to gain a better understand of the key features and differences between term vs. permanent life insurance.
| Aspect | Term Life Insurance | Permanent Life Insurance |
|---|---|---|
| Duration of Coverage | Fixed term (e.g., 10, 20, or 30 years) | Covers you for life |
| Policy Cost | Lower initial premiums, but not as good long-term value | Higher initial premiums with an accrued cash value over time |
| Cash Value | Not offered | Accrues over the life of the policy |
| Flexibility | Limited | High, especially for universal life insurance |
| Best For | Short-term financial goals (e.g., debt repayment or income replacement) | Long-term financial goals (e.g., estate planning or lifelong savings) |
Can You Cancel or Change a Permanent Life Insurance Policy?
Yes, you can cancel a permanent life insurance policy. If you choose to cancel your permanent life insurance policy before its maturity date, before you pass away, you will receive the cash value surrender, which is also known as the amount of cash your policy has built minus any surrender fees or charges for early cancelation. The longer your policy has been in force, the lower the amount of these fees and charges. Your cash value surrender is often paid out in one lump sum, but your policy's terms may dictate that you receive periodic payments instead.
Instead of canceling your permanent life insurance policy, you can also choose to borrow against the policy in the form of a withdrawal or loan. Typically, the amount you borrow is not subject to income taxes. Ask an independent insurance agent for assistance if you're considering canceling or surrendering your permanent life insurance policy.
Can I Outlive My Permanent Life Insurance Policy?
No, permanent life insurance policies are designed to cover you for your entire life. You can outlive a term life insurance policy. To avoid this, you can often convert your term life insurance policy into permanent life insurance before your coverage expires.
What Happens If I Stop Paying Premiums?
If you stop paying your policy's premiums, your coverage may lapse. Once your coverage becomes inactive, your chosen beneficiaires will not be able to receive a death benefit if you pass away. However, with permanent life insurance policies that have accrued a cash value already, your insurer may use some of that to pay your missed premium. In many cases, you will have some time to reactive your policy before you entirely lose your coverage.
How Can an Independent Insurance Agent Help Me?
When you're ready to shop and compare the best permanent life insurance policies, no one's better equipped to help than a local independent insurance agent. These agents have access to multiple life insurance companies in your area, so they know where to find the best coverage at a great rate. And down the road, your agent can help you file life insurance claims or update your coverage when necessary.
Sources
https://www.guardianlife.com/life-insurance/surrender
https://www.westernsouthern.com/life-insurance/term-vs-permanent-life-insurance
https://www.experian.com/blogs/ask-experian/what-happens-if-you-stop-paying-life-insurance-premiums/
