Permanent life insurance explained
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BLUEPRINT
Updated 6:41 a.m. UTC Feb. 22, 2024
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Key points
- Permanent life insurance generally provides coverage for your entire life and builds tax-deferred cash value.
- There are several types of permanent life insurance, including whole life insurance and universal life insurance.
- Permanent life insurance can be complex, so it may not be the best option for everyone.
If you’re considering a permanent life insurance policy, there are several factors to consider, including the types available, the pros and cons and the average cost of coverage. Here’s what you should know.
What is permanent life insurance?
Permanent life insurance is an umbrella term applied to life insurance policies that last your lifetime, as long as your policy premiums are paid. This is in contrast to a term life insurance policy, which only provides coverage and locked-in rates for a specific period of time, often 10, 20 or 30 years.
These policies typically have a cash value component, or a savings or investment account that you can borrow from while you’re alive. For that reason, many permanent life insurance policies are referred to as cash value life insurance.
Types of permanent life insurance
There are several types and subtypes of permanent life insurance, each with unique characteristics that may make one type more suited to your needs than another. Here are the most common types of permanent life insurance.
Whole life insurance
Whole life insurance provides lifelong coverage at a guaranteed rate, meaning your premium payments will remain the same over time. It also offers a guaranteed death benefit, or the sum of money your beneficiary will receive after you die.
Whole life insurance policies usually include a cash value that has a guaranteed rate of return.
Universal life insurance
A universal life policy also provides lifelong coverage and a cash value component, but it generally offers more flexibility than whole life insurance. That’s because you can often adjust the death benefit and premium payments associated with a universal policy. For instance, if your policy has accrued enough cash value, you may be able to use it to reduce or eliminate your premium payments.
There are several types of universal life insurance, and the cash value potential of each type varies.
- Guaranteed universal life insurance has a guaranteed death benefit, though cash value growth is minimal. You cannot adjust the premium payments or death benefit with this type of universal policy.
- Indexed universal life insurance often offers flexible death benefits and premiums, within policy limits. Its cash value is tied to market indexes, such as the S&P 500. When the indexes perform well, cash value grows quickly, though the opposite is also true — poor market performance can lead to slow or non-existent growth. The cash value potential of this type of policy is usually governed by a cap on gains, or the maximum amount you can earn regardless of how an index performs, and a floor, or the minimum rate of return, which can be as low as 0%.
- Variable universal life insurance also offers flexible premiums and death benefits. Its cash value is tied to the performance of sub-accounts (which essentially act like mutual funds) that you choose. This gives you more control over how your cash value is invested, but it also increases risk.
Variable life insurance
If you’re shopping for permanent life insurance, you may come across the term “variable life insurance” as you compare products. In the past, consumers were able to purchase a strictly variable life insurance product, but that’s uncommon in today’s market. “Variable life insurance” and “variable universal life insurance” are now commonly used to describe the same product, as most insurers only sell variable universal policies.
Survivorship life insurance
A survivorship life insurance policy provides coverage for two or more people, such as spouses, though business owners may also find this type of coverage useful.
Survivorship life insurance pays out the death benefit upon the death of the final insured. For instance, if a husband and wife purchase a survivorship policy and name their child as the beneficiary, the child will not receive the death benefit until both parents have died.
This coverage tends to be less expensive than policies meant for a single person, but it will not provide replacement income or financial support to a surviving spouse or partner if they are one of the two parties insured.
Burial life insurance
Final expense insurance, also known as burial insurance, is a type of whole life insurance that can help your beneficiary cover end-of-life expenses, such as a funeral, burial or memorial service.
The death benefit for burial insurance is generally low, from $5,000 to $25,000 — enough to cover the cost of a funeral with a little cushion.
Burial insurance is typically easy to qualify for as it does not require a medical exam to buy.
Ethos
What you should know
If you’re looking for quick coverage and a large death benefit, consider Ethos Term Life. Eligible applicants can get instant approval and coverage for up to $2 million.
Pros and cons
Pros
- Policies up to $2 million available.
- Instant application approval.
Cons
- Can’t convert to permanent life insurance policy.
More details
Ethos example premiums for a 20-year term policy
Pros and cons of permanent life insurance
Pros:
- Generally provides life-long coverage.
- Usually includes a cash value.
- Can be customized by purchasing riders, or add-on features.
- Death benefit is typically tax-free.
Cons:
- More expensive than term life insurance.
- Some types, like variable life insurance, can be risky.
- Cash value loans that are not paid back can reduce or deplete the death benefit.
Pros of permanent life insurance
Lifelong coverage
One of the biggest benefits of permanent life insurance is that, unlike term life insurance, coverage typically lasts your lifetime, as long as you pay your premiums.
“If you can afford it, the value of having permanent insurance is that someone’s going to benefit from it if something bad happens to you. So it could happen in one year, or 30 years. Either way, it’s providing that predictable liquidity,” said Eleanor Johnson, a chartered life underwriter and founding principal at Highland Capital Brokerage.
Essentially, it’s future-proofing your finances so your loved ones aren’t caught off-guard if they lose you and the income or financial support you provide.
Cash value
Permanent life insurance policies usually build cash value over time, which you may be able to withdraw, borrow against or use to pay your premiums.
There are also tax benefits associated with these policies, such as the fact that life insurance payouts to beneficiaries are generally tax-free, and cash value grows tax-deferred.
Customizable
“Permanent insurance today offers the ability to add riders that do other things that are kind of cool,” Johnson said.
For example, you may have the option to add a long-term care rider to a permanent life policy, which Johnson notes can be extremely useful. That would let you use some or all of your death benefit to pay for long-term care costs while you’re still alive.
Riders may come at an added cost, but some companies will include specific riders in their basic policy. Shopping around for coverage can help you compare life insurance rates and policy features.
Tax benefits
“The policy’s cash value grows tax-deferred, akin to a 401(k),” said Cameron Ellis, assistant professor of finance at the University of Iowa’s Tippie College of Business.
In addition, the proceeds of a life insurance policy pass to the beneficiary tax-free. Estate taxes may be applied under certain circumstances, such as if the beneficiary is not named or has passed. The same is true if the deceased’s estate falls below the exemption threshold but the death benefit payout extends the estate value beyond that level.
Irrevocable life insurance trusts (ILITs) and contingent beneficiaries can help avoid estate taxes.
Cons of permanent life insurance
Cost
One of the primary drawbacks of permanent life insurance is cost, particularly when compared to term life insurance.
Term life insurance policies are generally cheaper, making them an easier fit for stretched budgets.
Medical-exam may be required
Like other types of life insurance, you may have to complete a medical exam to qualify for certain permanent policies. If you have a serious health condition, permanent life insurance policies that require a medical exam or questionnaire may be more expensive or inaccessible.
If you’d prefer to skip a medical exam, there are no-exam life insurance policies available, but they tend to cost significantly more.
Cash value loans can impact coverage
Cash value loans may serve as a benefit to permanent life insurance policyholders, but if you don’t pay them back before you die, the death benefit for your beneficiaries will be reduced.
Cost of permanent life insurance
Permanent life insurance typically costs more than term life insurance. But how much you pay for coverage will depend on multiple factors, including:
- Age and gender.
- Weight and height.
- Nicotine use status.
- Medical history.
- Family’s medical history.
- Prescription drug history.
- Driving record.
- Profession and hobbies, if considered high-risk.
The tables below provide an example of how much a non-smoker may expect to pay for a $250,000 whole or universal life insurance policy at ages 30, 40 and 50.
Average monthly rate for a $250,000 whole life insurance policy
| AGE 30 | AGE 40 | AGE 50 | |
|---|---|---|---|
Man
| $214
| $313
| $470
|
Woman
| $193
| $280
| $419
|
Source: Blueprint research. Average rates are based on the three lowest online quotes for non-smoking male and female applicants of average weight and height.
Average monthly rate for a $250,000 universal life insurance policy
| AGE 30 | AGE 40 | AGE 50 | |
|---|---|---|---|
Man
| $105
| $149
| $216
|
Woman
| $95
| $137
| $197
|
Source: Blueprint research. Average rates are based on the three lowest online quotes for non-smoking male and female applicants of average weight and height.
Should I get permanent life insurance?
If you want a life insurance policy that lasts a lifetime and builds cash value, permanent life insurance may be worth considering. However, this type of policy isn’t best suited for everyone.
“Life insurance primarily safeguards lost income that beneficiaries depend upon. Most people can predict when their income stream will cease at retirement or when dependents will be financially independent,” said Ellis.
“Usually, it’s more economical to buy term life and invest the savings in premiums. However, individuals with complex estates, such as small business owners, might benefit from the specific tax treatments.”
Permanent life insurance can be complex, especially universal and variable policies. If you’re considering a policy, schedule a meeting with a trusted financial advisor. They can review your financial goals and provide guidance on which type of policy would best suit your needs.
Frequently asked questions (FAQs)
Yes, you can typically cash out a permanent life insurance policy. But this would mean giving up your coverage. And, according to Ellis, it’s typically not worth the sacrifice.
“In financial emergencies where insurance coverage is still desired, consider taking loans against the policy. If the insurance portion is not needed, and the policy has been in place for some time, reselling it on the secondary market might be more beneficial,” he said.
And if you do decide to surrender your policy, there’s another step you need to take first.
“Before doing anything consult your insurance advisor and have them run an in-force ledger to figure out how it will impact you,” advised Johnson. That way you’ll be aware of any potential tax liabilities or other consequences that might come along with cashing out that policy.
If you want coverage designed to last a lifetime and would like a life insurance policy with a cash value, permanent life insurance may be worth it to you.
However, if you feel you only need coverage for a specific period of time, such as until your mortgage is paid off or your children become financially independent, consider a more affordable term life insurance policy.
Permanent life policies, such as whole life insurance, often include a cash value component that will grow over time. How the cash value accumulates will depend on the type of policy you have.
For instance, the cash value of a whole life insurance policy may not grow as quickly as a variable life insurance policy, but it offers a guaranteed rate of return. Conversely, the cash value of an index universal life insurance policy may grow at a faster rate when markets are performing well, but the opposite can be true when markets are less favorable.
Term life insurance is a type of coverage that allows you to lock in rates and coverage for a set period of time, such as 10, 20 or 30 years. Unless you renew your policy at the end of the term, your coverage typically expires.
Permanent life insurance generally lasts a lifetime, meaning you have coverage until you die, as long as you maintain your premium payments. Permanent policies also frequently have a cash value component, while term policies do not.
Not sure which policy is best for you? Types of life insurance
Yes, some life insurance policies pay dividends. Whole life insurance is the most common type of life insurance that offers dividends.
Dividends in life insurance act as a partial return of premium feature. The life insurance company invests a portion of your premium payments. If the company makes successful investments and keeps operating expenses low, a portion of the surplus is returned to you as a dividend payment.
If you want a life insurance policy that returns dividends, look for a “participating” instead of a “non-participating” policy, as non-participating policies don’t issue dividends.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
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