What is Permanent Life Insurance?
Permanent life insurance is life insurance that lasts the insured’s lifetime as long as they meet the requirements for keeping it active, which usually means paying their policy premiums. Permanent life insurance may also include a cash value component that the insured can use while alive.
Permanent life insurance vs. term life insurance
There are two main categories of life insurance: permanent life insurance and term life insurance.
Both policy types pay out a death benefit, or a lump sum of money, to the people or entity the policy owner designates if the insured dies while the policy is in force. More simply put, if you buy life insurance on yourself and die while the policy is active, the people you’ve named will get a set amount of money from the life insurance company.
The main difference between permanent and term life insurance is the longevity of the policy. You buy term insurance for a specific number of years (e.g., 10-year term, 30-year term). At the end of the term, the premiums increase, usually significantly. Therefore, the majority of people will drop their term policy upon completion of the level-premium period.
Permanent life insurance, however, is exactly what it sounds like: life insurance that lasts permanently. Once you buy the policy, you lock in the coverage for your lifetime.
Term life insurance is generally much more affordable during the policy term, but permanent life insurance allows individuals to get premiums they can maintain for their lifetime.
Understanding cash value
Unlike term insurance, permanent life insurance often includes a cash value component. This is a savings element within the policy.
Each time you pay your permanent life insurance premiums, a portion of that money goes into the policy’s cash value. That money then grows over time. The way it grows depends on the type of permanent policy you buy (see below).
As the policy owner, you have options to use that cash value component while you’re alive. You can generally:
- Use it as collateral for a low-interest loan
- Withdraw it
- Use it to make premium payments
Two things to note here: first, you generally won’t be able to use your cash value right away. Most insurance companies require it to accumulate to a certain amount before you can touch it.
Secondly, if you pull from your cash value, that amount you take will generally be subtracted from the death benefit your beneficiaries receive when you pass away. If you take out a loan against your cash value, for example, and die while a portion of the loan is still outstanding, your insurance company will most likely deduct that outstanding amount from the death benefit they pay out.
Types of permanent life insurance
You have the option to choose between four main types of permanent life insurance:
- Whole life insurance. This is the simplest and most common type of permanent life insurance. Generally, it comes with premiums and a death benefit that are fixed and a cash value component that grows at a steady rate of interest. Your insurance company may or may not pay dividends on the cash value, too.
- Universal life insurance. With this type of permanent life insurance, you get the ability to adjust your death benefit and your premiums. Once your cash value reaches a certain threshold, you can use it to pay all or a portion of your premiums, delivering premium flexibility. Keep an eye on things, though, because using all of your cash value up can cause your policy to lapse.
You can also increase or decrease a universal policy’s death benefit as your needs change. If you opt for a larger death benefit, be prepared for your premiums to increase. There are also different types of universal policies, such as Guaranteed Issue, Indexed Universal or Variable Universal.
- Variable life insurance. If you like investing, this life insurance product could be for you. Variable life policies give you a death benefit and a cash value component, but you can invest the cash value in stocks, money market mutual funds, or bonds. That means you take on some risk. If your investments perform well, your policy will grow. But if they don’t, you could see not just your cash value but also your death benefit drop. Some insurance companies set a minimum death benefit threshold, though, to ensure your beneficiaries are left with something even if your investments underperform.
- Variable universal life insurance. These policies combine variable and universal policy benefits. You choose investment options and the cash value grows based on how they perform, and you get a flexible death benefit and flexible premiums.
Different types of permanent life insurance policies come with different features. But the main thing to know about permanent life insurance is that it will last your lifetime (as long as you pay your premiums) and it includes a cash value component.