Quick Look
Permanent life insurance…
- is useful for people who want a payout regardless of when they die
- is more expensive than Term life insurance
- provides the ability to access the “cash value” of the policy while your living
- may provide an investment component allowing for growth – but there may be better investment options outside of an insurance policy
Term vs. Permanent Life Insurance
When it comes to life insurance, there are two main types: Term and Permanent. Term life insurance offers coverage for a specific period (often 10, 20, or 30 years), is relatively inexpensive, and simple (pay your premiums and if you die during the term, the benefit will be paid). In other content, we’ve noted that term life insurance – for most people – is the way to go.
However, if you’ve reached the stage of financial Abundance, there may be good reasons to consider a permanent insurance policy. At its most basic, the difference between Permanent and Term life insurance is that Permanent life insurance lasts a lifetime (or as long as you pay your premiums) whereas term only lasts for the specified term.
This article aims to provide you with a basic understanding of permanent life insurance. After reading it, you’ll be prepared to ask intelligent questions in the event a financial or insurance professional pitches you on the idea. From there, you can decide if it’s right for you.
Common Reasons to Consider Permanent Life Insurance
Below are some of the most common reasons people consider a permanent life insurance policy.
- Need for Payout, Regardless of When You Die: Life insurance is necessary if you have financial dependents, typically children. The goal of a term policy is that it should end when your children become financially independent. However, if you have financial dependents with special needs or disabilities, a permanent policy ensures for their ongoing care after your passing.
A permanent life insurance policy ensures you will leave something for your financial dependents regardless of when you die.
- Desire to Leave an Inheritance: With any active insurance policy, there is a death benefit. This is the money that is paid out to the listed beneficiaries upon your death. If you are looking for a way to effectively guarantee that your beneficiaries receive a benefit regardless of when you die, a permanent life insurance policy can give you this option.
- Desire to Cover Final Expenses: Permanent life insurance can offer readily available cash for final expenses such as funeral services. Additionally, since life insurance benefits aren’t generally taxed, a permanent policy can also be used to help cover estate taxes. The beneficiary will have flexibility to determine how the funds are used, but the policy’s intended purpose may affect how you size and structure the policy.
- Desire to Leverage Cash Value of the Policy: Permanent life insurance policies typically have a cash value component. A portion of the premiums paid goes into a cash value account, which can grow over time. This cash value can often be accessed through policy loans or withdrawals, providing a potential source of funds for emergencies or future expenses. Do note however, that there are often better ways to serve these purposes. Therefore, a desire to leverage the cash value is rarely a reason on its own to consider permanent life insurance.
If the reasons listed above fit your circumstance, use the My Notes tool above to write down your thoughts and keep reading.
Components of Permanent Life Insurance
Permanent life insurance policies can be complex. To make matters more confusing, different providers use names specific to their companies to describe different policy arrangements. But most policies will have some mix of the components described below.
- Death Benefit: This is the cash paid to policy beneficiaries upon the death of the policy holder.
- Premiums: These are the annual dues you pay to keep the policy active.
- Cash Value: This is the value of the policy available for loans or payout should you choose to discontinue the policy. Note that the concept of a “Cash Value” only applies to permanent life insurance policies.
- Investments: Some portion of your premiums may be used in an investment component. The performance of the investment component may affect the cash value of the policy.
- Dividends: These are payouts based on the investment component. Often, dividends are used to pay a portion of policy premiums or increase the cash value of the policy.
Types of Permanent Life Insurance
Within the category of permanent life insurance, there are few subcategories: Whole Life and Universal Life. Take a look at the chart below to understand the differences.
| Whole Life | Universal Life | |
|---|---|---|
| Overall | Inflexible but policies are comparably simple with costs and values known. | Flexible policies allow for adjustments as your life changes but values and benefits can change too. |
| Premiums | Consistent premiums (your costs) that don’t change over the course of the policy. | Ability to raise or lower your premiums depending on circumstances. They may go up however as you age. |
| Cash Value | Growth of the cash value is locked in at a given rate based on premiums paid. This can be a benefit if you want to access the cash. | The rate of the cash value growth is consistent but since premiums may vary, cash value may change. |
| Death Benefit | Contains a guaranteed death benefit minus any non-paid-back cash value withdrawals or policy loans. | Value of the death benefit may change depending on premiums or other factors. |
| Cost | The inflexibility of these policies bring guarantees of value but generally make these more expensive. | The flexibility of these policies reduce guarantees of value but generally make these less expensive. |
With Universal Life policies, two sub categories are “Variable Universal Life” and “Indexed Universal Life.” “Variable” ties the cash value component of the policy to stock market investments. In these policies, you have no cap on gains but also no floor on losses (i.e. you could lose the entire cash value of your policy). “Indexed” ties the cash value component to a specific broad stock market index. Here, you have a cap on gains and losses.
The Takeaway on Permanent Life Insurance
Permanent life insurance policies sometimes get a bad rap due to their complexity and the fact that most people will be better served by Term life insurance. But the truth is, in certain circumstances, they can be a useful tool in your financial toolkit.
If you’re considering a permanent life insurance policy you’ll want to do additional research on the cost of the policy, cash value, whether or not a health exam is required, and how it might factor into your longer-term estate plan. Be sure to make a list of your questions before you meet with an insurer and that you fully understand your policy before you commit.
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