Permanent life insurance: How it works

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Permanent life insurance is a type of life insurance policy that provides coverage for your entire lifetime, as long as premiums are paid. Unlike term life insurance, which only lasts for a set period, permanent life insurance never expires, offering lifelong financial protection for your loved ones. In addition to the death benefit, these policies often include a cash value component, which grows over time and can be accessed while you’re still alive, making them a flexible option for long-term financial planning.

One of the main benefits of permanent life insurance is its ability to build cash value on a tax-deferred basis. This allows policyholders to borrow against or withdraw from the cash value, giving them access to funds for various needs, such as paying off debts, supplementing retirement income, or covering emergency expenses. However, it’s important to note that borrowing from your policy can reduce the death benefit and impact the policy’s overall value.

While permanent life insurance offers lifelong coverage and financial flexibility, it is generally more expensive than term life insurance. Premiums tend to be higher because of the lifetime coverage and the added cash value feature. For those seeking long-term financial protection, estate planning solutions, or a policy that grows in value over time, permanent life insurance can be a valuable option.

Types of permanent life insurance

Whole life insurance: Offers guaranteed death benefits, fixed premiums, and a cash value component that grows at a guaranteed rate.
Universal life insurance: Provides flexible premiums and death benefits, with the cash value tied to current interest rates.
Indexed universal life insurance: Similar to universal life but the cash value growth is linked to a stock market index, offering the potential for higher returns.
Variable life insurance: Allows you to invest the cash value in various sub-accounts, offering the potential for greater growth but also more risk.
Variable universal life insurance: Combines the flexibility of universal life with the investment options of variable life, allowing you to adjust premiums, death benefits, and investment choices.

How the cash value works in permanent life insurance

The cash value in a permanent life insurance policy is a key feature that sets it apart from term life insurance. As you pay your premiums, a portion goes toward building cash value, which grows over time on a tax-deferred basis. This cash value acts as a savings component within the policy, accumulating at a guaranteed rate (in the case of whole life) or based on factors like market performance (with universal or variable life policies). You can access this cash value during your lifetime, either by withdrawing funds, taking out a loan against it, or even using it to pay future premiums.

However, it’s important to note that using your cash value can impact your policy. For instance, taking out a loan or making a withdrawal may reduce the death benefit available to your beneficiaries if not repaid. Additionally, surrendering the policy early to access the full cash value could mean losing the death benefit altogether. While the cash value can be a helpful financial tool, it’s essential to understand how it affects the overall policy before tapping into it.

Advantages and disadvantages of permanent life insurance

Pros

Lifelong coverage. Provides protection for your entire life as long as premiums are paid.
Builds cash value. Accumulates a cash value over time, which can be accessed through loans or withdrawals.
Tax-deferred growth. Cash value grows tax-deferred, meaning you won’t pay taxes on it as it accumulates.
Level premiums. Premiums typically remain fixed throughout the life of the policy.
Potential for borrowing. You can borrow against the cash value for emergencies, retirement, or other needs without having to go through a lender.

Cons

Higher premiums. Permanent life insurance is more expensive than term life insurance due to lifelong coverage and the cash value component.
Complexity. Policies can be complicated, especially with investment-linked options like variable or indexed universal life insurance.
Slower cash value growth. In the early years of the policy, the cash value grows slowly, often taking time to accumulate meaningful value.
Potential reduction in death benefit. Accessing cash value through loans or withdrawals can reduce the death benefit if not repaid.
Surrender charges. If you cancel the policy early, you may face surrender charges that reduce the cash value you receive.
Not a replacement for traditional investments. While it has a cash value component, permanent life insurance should not be relied on as a primary investment strategy, as other options may offer higher returns and lower fees.

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How much does permanent life insurance cost?

The cost of permanent life insurance varies based on several factors, including your age, health, the type of policy, and the amount of coverage you choose. Because permanent life insurance provides lifelong coverage and includes a cash value component, premiums are generally higher than term life insurance. For example, a healthy individual in their 30s may pay several hundred dollars per month for a permanent life policy, whereas a comparable term policy could cost significantly less.

Other factors that affect the cost include the type of permanent life insurance you select—whole life, universal life, or variable life—as each comes with different levels of flexibility and investment options. Additionally, insurance companies may charge more if you have pre-existing health conditions or engage in high-risk activities.

Who should consider permanent life insurance?

Permanent life insurance is a good option for individuals seeking lifelong coverage and those who want to build cash value over time. It’s ideal for people who have long-term financial obligations, such as dependents who will rely on financial support for many years or those planning for large expenses like estate taxes. High-net-worth individuals, in particular, may find permanent life insurance useful for estate planning, as the death benefit can help cover estate taxes or leave a legacy for heirs.

This type of insurance is also suited for people who want more than just death benefit protection. Those who see value in using the policy’s cash value for supplemental retirement income, borrowing against it for emergencies, or using it to pay premiums may benefit from the flexibility that permanent life insurance offers. However, it’s important to note that the higher premiums mean it’s most practical for those with the financial means to maintain the policy over the long term.

How to choose the right permanent life insurance policy

Choosing the right permanent life insurance policy depends on your financial goals, coverage needs, and long-term plans. Start by assessing how much coverage you need and whether you’re primarily interested in providing a death benefit or building cash value for future use. If you’re looking for guaranteed coverage and stable premiums, whole life insurance may be the best fit, as it offers predictable costs and guaranteed cash value growth. On the other hand, if flexibility in premiums and death benefits is important to you, a universal life insurance policy might be a better option.

You’ll also want to consider how much risk you’re comfortable with when it comes to the cash value portion of the policy. If you prefer conservative growth, a whole or universal life policy with guaranteed cash value may be ideal. However, if you’re open to investment risk for the potential of higher returns, a variable or indexed universal life policy could be a good fit.

Consulting with a financial advisor when purchasing a permanent life insurance policy is important. Permanent policies are complicated, and a financial advisor can help you determine which policy and strategy is best for your needs.

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Cynthia Bowman

Contributing Researcher

Cynthia Paez Bowman is a personal finance writer with degrees from American University in International Business and Journalism. Her work has been featured in MSN, Brex, Bankrate, Freshome, The Simple Dollar, GOBankingRates, and more. Cynthia is based between Las Vegas and Europe. In her spare time, she travels throughout Africa and the Middle East helping women entrepreneurs develop and grow their businesses.