Permanent life insurance

There are two main types of life insurance: permanent and term. Permanent life insurance is designed to offer lifelong coverage, with policies typically lasting until you reach the age of 95 to 121, depending on the contract terms. Unlike term life insurance, which only provides protection for a set number of years, permanent life insurance ensures that as long as you continue paying premiums, your coverage remains active throughout your life. This type of policy not only offers a guaranteed death benefit but also builds cash value over time — a feature that can be accessed while you’re still alive.

At Bankrate, we aim to break down the complexities of permanent life insurance so you can determine if it’s the right option for your long-term financial security. Whether you’re looking for stable lifelong coverage or the added benefit of a cash value component, this guide will help you understand how permanent life insurance works and how it might fit into your financial plans.

What is permanent life insurance?

Permanent life insurance is all about lifelong protection, offering peace of mind that your loved ones will be taken care of no matter when the time comes. Unlike term life insurance, which covers you for a set number of years, permanent life insurance sticks with you for the long haul — as long as you keep up with your premiums. This kind of policy not only helps with end-of-life expenses but can also leave behind a lasting financial legacy. However, the added benefits come at a higher price, making it a more expensive option than term life.

One unique feature of permanent life insurance is its cash value component. While this portion of the policy grows tax-deferred over time, it doesn’t become accessible overnight. It usually takes years for the cash value to build up enough to tap into, although single-pay policies (which require a large one-time payment upfront) and some limited-pay policies (where premiums are paid off within a set number of years) allow the cash value to grow faster. Once the cash value grows enough, you can borrow or withdraw from it — typically tax-free. But keep in mind, this cash value is for you, the policyholder, not your beneficiaries. In most cases, it won’t be added to the death benefit they receive; it’s your personal financial resource to use while you’re alive if you choose to do so. There are potential consequences to accessing these funds, which we’ll get into later.

Permanent life insurance is a commitment, but it offers stability and flexibility, ensuring your family has long-term financial protection while giving you access to funds if you need them down the road. It’s a policy built for both security and financial freedom, just be prepared to give it time to fully grow.

How does permanent life insurance work?

Permanent life insurance offers lifelong coverage, but it’s not just about providing a death benefit to your loved ones — it comes with a growing cash value feature that you can access while you’re alive. Although there are slight variations as to how the cash value grows, depending on the type of policy you purchase, essentially, when you pay your policy’s premiums, a portion goes toward the cost of insurance and another portion is allocated to the cash value component. The funds in the cash value component earn compounded interest based on either a fixed or variable rate, depending on the policy. 

It usually takes a few years before the cash value has accumulated enough to access, but once it does, you can use these funds however you choose. Here’s how it works:

Withdrawals vs. policy loans: Accessing your policy’s cash value can be done in two ways:

• Withdrawals: This is a straightforward removal of cash from your policy. While the amount withdrawn is typically tax-free up to the amount you’ve paid in premiums, it will reduce the death benefit your beneficiaries receive. In other words, what you take now might shrink what’s left later. Note: whole life policies do not allow for withdrawals. 
• Policy loans: You can access cash value via a loan. These loans aren’t reported to the IRS or crediting agencies, but they do accrue interest. As long as the loan is repaid, it won’t reduce the death benefit. But if left unpaid, the amount owed plus the interest will be deducted from your beneficiaries’ payout.

Accessing your cash value can slow down its growth since the compounding interest accrual is limited to what is leftover. In other words, if your cash value equals $15,000 and you take out a loan of $10,000 – the earned interest is applied only to the remaining $5,000.

Additionally, outstanding loans accrue interest. If you fail to pay back the loan or at least pay back the interest, it could quickly get out of hand. If the balance ever exceeds the cash value, your policy will terminate.

In addition to cash value accumulation, some permanent life insurance policies have another benefit term life insurance doesn’t: dividends. If you have a participating whole life policy, you could earn dividends based on your insurer’s financial performance. These dividends aren’t guaranteed, but they can be used in several ways:

• Lowering your premium payments
• Buying additional coverage
• Taking it as cash
• Using it to pay policy loans

This extra benefit can make your policy even more valuable over time, giving you flexibility in how you manage it.

Permanent life insurance isn’t a “set it and forget it” type of coverage, especially if you’re dipping into the cash value. Frequent withdrawals or loans require active monitoring to ensure you don’t deplete the policy to the point where it could lapse. If your loan balance and accruing interest start to exceed the cash value, you could lose your policy entirely. Keeping tabs on your policy’s performance helps ensure that your coverage remains intact for the long haul.

Advantages of permanent life insurance policies

Permanent life insurance offers more than just basic coverage. It comes with unique benefits that make it a versatile financial tool. From steady protection to cash value access, these policies offer some serious perks that can provide both peace of mind and financial flexibility.

• Lifelong coverage: Forget the hassle of renewing policies — permanent life insurance keeps your coverage intact for life, typically up to age range of 95 to 121. You’re covered as long as you pay the premiums, with no expiration date looming over you.
• No worries about health changes: Even if your health takes a turn, your coverage won’t. Once you’re locked into your policy, future health conditions won’t affect your premiums or coverage.
• Dividends for extra value: Some whole life policies offer dividends, a potential perk that’s often overlooked. These dividends can be used to lower premiums, increase your coverage or simply cashed out — a nice bonus on top of your core benefits.
• Access to cash value: Need extra funds down the road? You can tap into the growing cash value, using it for emergencies or life events.
• Peace of mind for the long haul: Knowing your family will be financially secure, regardless of what the future holds, brings a sense of calm. Permanent life insurance isn’t just about coverage, it’s about ensuring that your loved ones are always protected.

Disadvantages of permanent life insurance policies

While permanent life insurance offers several benefits, there are also some drawbacks that could make it less appealing depending on your needs. Here’s a closer look at what you should consider:

• Significantly more expensive: Permanent life insurance can cost 10 to 15 times more than term life policies. The higher premiums can be a burden, especially if you’re mainly looking for more affordable life insurance without the extra frills.
• Requires monitoring: A permanent policy typically needs to be actively managed, especially if you’re tapping into its cash value. Frequent loans or withdrawals can impact the policy, so it’s important to keep track of how it performs over time to avoid unwanted surprises like lapses in coverage. Also, if the policy earnings are less than expected or the cost of insurance or mortality charges are higher than expected, the policy could terminate early or require additional premiums. 
• Sold as an “investment”: Some permanent life insurance policies are marketed with investment-like features, but don’t be fooled. Insurance is primarily designed for protection. It is an insurance contract, not an investment contract. While these policies may have cash value components or dividends, actual investments like various retirement accounts, stocks and mutual funds are likely to provide better returns since they don’t have policy fees or an insurance charge. It’s important to know that life insurance is a safety net, not a replacement for traditional investment strategies.

Types of permanent life insurance

There are five main types of permanent life insurance policies. They are distinguishable by how they invest the cash value portion of the policy, whether you can adjust the premium amount and if you can increase or decrease the death benefit.

• Whole life insurance: This is the most straightforward type and provides the most guarantees. Whole life guarantees you a minimum rate of return on your cash value, and the death benefit remains fixed. In some cases, the policy might provide you with dividends that you could choose to use to pay your premiums. 
• Universal life insurance: Universal life policies offer more flexibility than whole life insurance. You can adjust your death benefit or premiums over time, depending on your financial needs. However, unlike other policies that may fluctuate with market trends, the interest on your cash value is set by the insurer and does not directly respond to changing interest rates.
• Variable life insurance: Variable life insurance gives you control over how your cash value is invested by allowing you to choose from various subaccounts, typically tied to stock and bond funds. While this can result in higher potential gains, it also comes with greater risk since the insurer provides limited guarantees. If your chosen investments don’t perform well, your cash value, and potentially your death benefit, could take a hit.
• Variable universal life insurance: As the name implies, this life insurance policy combines elements of universal and variable life insurance. Variable universal life insurance offers adjustable premiums and death benefits, and the cash value is typically invested in stock market funds. The cash value gains or losses may or may not be capped, depending on your insurer.
• Indexed universal life insurance: The interest that an indexed universal life insurance policy earns is tied to the performance of an underlying financial benchmark, such as the S&P 500. However, this type of life insurance typically protects the policyholder against market drops. When an index rises during a given crediting period, the policy pays a proportional amount of interest into the cash value. If the index declines, then no interest will be earned, but the cash value will not decline. It’s also important to note that these policies have caps on the maximum return as well as participation limits on the total return. For example, the policy may have a 10% cap with an 80% participation rate,  which means that the actual maximum net return would be 8%. Generally speaking, indexed universal life insurance policies also have the same types of flexibility as universal and variable universal policies.
• Guaranteed universal life insurance: This permanent policy is more closely related to a term policy as it can be designed to act as a lifelong policy with a guaranteed level premium and death benefit to a maximum age of 95 to 121. It’s typically more affordable than other types of permanent coverage but accumulates little cash value funds, if any.

How much does permanent life insurance cost?

Permanent life insurance rates come with a higher price tag, often 10 to 15 times more expensive than term life insurance, mainly because a payout from the insurer is essentially inevitable. It might help to think about it like this: with a 10-year term policy, there is a possibility — but not a guarantee — that you pass away while the policy is active and the insurer pays out the death benefit. With a permanent policy, it’s not a question of if but when.

How much you pay for a life insurance policy will also vary based on personal factors, such as your age, gender, overall health and the amount of coverage you want. Your lifestyle, for example, whether you smoke, have a risky job or partake in dangerous hobbies, also factors in. Some insurance providers require a medical exam, too, especially if you decide to purchase a policy with a higher death benefit.

Typically, the larger the death benefit, the higher your premium will be. To get the best price, experts recommend shopping around and comparing quotes before you commit to a policy. It’s especially important to shop around if you have health concerns.

Who should buy permanent life insurance?

Permanent life insurance is a serious commitment, and it’s not for everyone. However, for some people, the benefits far outweigh the costs. Here’s who may want to consider this type of policy:

• You need lifelong coverage: If you don’t want the hassle of renewing a policy later in life or worrying about losing coverage as you age, permanent life insurance gives you peace of mind by offering lifelong protection.
• You have estate taxes due: If estate taxes are a concern, permanent life insurance can provide your heirs with the liquidity they need to cover those taxes without selling off assets or scrambling for cash.
• You want to leave a larger inheritance: Permanent life insurance can help ensure that your heirs receive a significant financial cushion after you’re gone, especially if you’re looking to leave behind a legacy.
• You can afford the premiums long-term: Permanent insurance is a long-term financial commitment. The premiums are much higher than term policies, and they’ll be with you year after year. You need to be sure that you can afford these costs over the course of your life without straining your finances.
• You have a dependent who needs lifelong care: If you have a dependent, like a child with a disability, who will require financial support long after you’re gone, permanent life insurance can provide for their needs.

Finally, it’s important to remember that life insurance and investing serve two different purposes. Buying a cash value life insurance policy should not be your primary wealth-building or retirement strategy. Life insurance is meant to protect your loved ones financially, not to replace smart investing for your future.

Frequently asked questions

• Is term life insurance or permanent life insurance better?
  

  The best life insurance for you will depend on your financial goals. If you only want coverage for a specific period, such as when your children are young, a financial advisor or licensed agent may recommend term life insurance. If you want lifelong coverage and a cash value account, however, a permanent life insurance policy may be a better fit.

• How does cash value work?
  

  Part of your premium payment goes toward your cash value account, which builds value over time. These accounts can accumulate interest and/or returns. Some policies allow you to choose the investment funds associated with your cash value account. As the account accrues value, you may be able to pay your premiums with the money in the account, withdraw it or borrow against it.

• Do I need to purchase life insurance for my child?
  

  Purchasing life insurance for your child, like a children’s whole life policy, guarantees their future insurability and allows you to transfer ownership to them when they reach adulthood. However, it’s not typically a necessary purchase for most families. While it ensures that your child has a policy in place for life, there are often better ways to build a financial safety net for their future, such as opening a 529 Plan for education savings or starting a savings account in their name.

  A more affordable option is a child rider, which can be added to your own life insurance policy. It provides a smaller death benefit and the option for your child to purchase life insurance later, even if their health changes. This offers the same guaranteed insurability without the high costs of a separate whole life policy.