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Permanent Life Insurance: Benefits & Types
By Joan Pabón MONEY RESEARCH COLLECTIVE
Unlike term life insurance, permanent life insurance policies are meant to last a lifetime. Besides guaranteeing a death benefit, they have a savings or investment feature that grows on a tax-deferred basis.
These attractive features come at a cost, however. Permanent life insurance policies are far more expensive to buy — between five and fifteen times more — than term life insurance policies.
If you have the means to pay permanent life insurance premiums, these policies have some great benefits as well as some potential drawbacks.
Read on to learn more about the different types of permanent life insurance policies and decide if any of them are right for you.
Table of contents
- What is a permanent life insurance policy?
- How does permanent life insurance work?
- Types of permanent life insurance
- Permanent vs. term life insurance
- How to choose the right permanent life insurance
- How much does permanent life insurance cost?
- Permanent life insurance FAQs
- Summary of our guide to permanent life insurance
What is a permanent life insurance policy?
Unlike term life insurance policies, which cover you for five to 30 years, permanent policies are meant to last your entire life — provided you keep up with premium payments. Permanent life insurance pays out a death benefit to your beneficiaries regardless of when you die.
Besides offering a death benefit, permanent life insurance policies also have a savings or investment component called a cash value. As you pay your monthly life insurance premium, a portion of that payment will go toward building cash value on a tax-deferred basis.
Whether your policy’s cash value growth is guaranteed or not will depend on the type of permanent life insurance policy you choose. Additionally, cash value growth slows down as you age, since more of your premium payment goes toward covering the cost of insurance and offsetting the insurance company’s increased risk.
Benefits and disadvantages of permanent life insurance
There are different types of cash-value insurance options, each with their particular benefits and potential drawbacks. With that in mind, the following general pros and cons apply to all cash value life insurance policies.
- Provide lifetime coverage, as long as you pay your premiums
- Have a cash value feature from which you can borrow and draw
- Cash value grows on a tax-deferred basis
- Some policies provide a guaranteed a death benefit and premiums
- Far more expensive than term life insurance policies
- Cash value growth is not guaranteed with some policies
- Your beneficiaries do not receive the cash value upon your death
- The policy could lapse if the cash value is depleted
- Borrowing against the policy could reduce the death benefit
How does permanent life insurance work?
Permanent life insurance policies, meaning those that have a cash value component, are meant to provide lifetime coverage. What does that mean?
According to Fidelity Life, most permanent policies mature when the insured reaches the age of 121, at which point the coverage ends and the plan pays out the death benefit. Considering the average human lifespan, a permanent policy should pay out well before its maturity.
Another feature of permanent life insurance is the ability to build cash value. When you pay the premiums on permanent life insurance, a portion of those payments goes toward funding the policy’s death benefit. Another portion goes toward the cash value.
In the first years of the policy, when you’re (presumably) young and healthy, a greater portion of your premiums go toward funding the cash value. Later in life, as your risk of dying increases, more of your payments go toward helping the insurer prepare to pay the death benefit. Cash value growth then slows.
The growth in the policy’s overall worth through cash-value is tax-deferred. That can result in an attractive living benefit for the policyholder, who can tap the cash value while they are still living.
Nevertheless, it’s important to note that permanent life insurance policies pay out only a death benefit to beneficiaries upon the insured’s death; the cash value stays with the insurance company.
Once you have sufficient cash value accumulation, you can use it in several ways, including:
- Making withdrawals – You may be able to make partial tax-free withdrawals from your policy, provided you don’t exceed your basis (the total you’ve paid into the plan). Taking withdrawals from your policy could also reduce its surrender value (the money you’d get if you canceled it) as well as your beneficiaries’ death benefit.
- Paying your monthly premiums – Once your policy has sufficient cash value growth, you can use it to pay your monthly premiums, whether in whole or in part. Just be mindful of not depleting your cash value altogether, which would result in a policy lapse.
- Taking out loans – You can also use the balance in your cash value account as collateral against which to borrow from your insurer. While you don’t have to undergo a credit check to qualify for this type of loan, you’ll still have to repay it if you want your beneficiaries to receive the full death benefit. If you died with an outstanding loan balance on your account, those funds (plus interest) would be deducted from the death benefit payout. Payments may be flexible, however, making this a good last resort in the event of an emergency.
Another way of getting cash value back from the insurer is to surrender or cancel your policy. This entails forfeiting the death benefit and possibly having to pay surrender charges. And while you receive what you’ve paid into the policy tax-free, any earnings that have accumulated in your cash value account are taxable.
Before canceling your policy, consult a financial advisor to determine how to maximize the policy’s surrender value.
Types of permanent life insurance
Whole life insurance and universal life insurance are the two primary types of permanent policies. Both have the same basic components: a death benefit that will pay out regardless of when you die and a cash value feature.
Whole life insurance
Whole life insurance, also called ordinary life, is the most expensive permanent life insurance option — and with good reason.
This type of policy offers policyholders several guarantees: your premium will never increase, your cash value will grow at minimum rate of return and your beneficiaries will receive a fixed death benefit. (The latter is the case provided there aren’t any outstanding loans against the policy at the time of your death.)
This policy may be a good option for people who need a guaranteed death benefit, such as those with disabled adult dependents. The main drawback of whole life insurance is its cost; average rates can be up to seven times those for term life insurance.
According to Guardian Life, a $100,000 whole life policy could cost a 30-year-old non-smoker with a preferred health status between $80 and $89 per month. As with all types of life insurance, it’s generally less costly to get coverage when you’re young and healthy.
Whole life policies may be structured differently with regard to premium payments, death benefit payouts and cash value investments. Here are some key aspects to these policies:
- Limited payment – Allows the policyholder to make oversized premium payments for a specified number of years, in order to avoid payments in later years.
- Modified premium – Allows the policyholder to make smaller payments for a number of years, and then pay larger premiums in later years.
- Single premium – The policyholder can fund the policy in full through a single payment.
- Survivorship – Provides coverage for two people. Depending on how the plan is set up, the policy pays out a death benefit when one or both individuals have died.
Universal life
Universal life insurance policies allow for greater flexibility than whole life policies. Policyholders may increase the death benefit — upon passing a medical examination — and premiums may be adjusted as soon as there are sufficient funds in the cash value to draw from them to pay the premiums.
However, while the cash value grows at a guaranteed market rate, the policy’s premium flexibility can affect its total possible cash value over the life of the policy. Moreover, withdrawals from the policy are taxable and stopping or reducing premium payments could lead to the cash value being depleted, making the policy lapse.
Besides universal life insurance, there are several other permanent life insurance options that cater to different needs. Each of these plans is structured differently with regard to how the cash value is invested and can grow over time.
- Variable life – The cash value portion of the policy goes into sub-accounts that can be invested in money market mutual funds, stock or bonds. While these options could lead to faster growth, gains are not guaranteed, which opens you up to greater risk. Depending on the policy, declines in the cash value can lead to a decreased death benefit. Some plans, however, set a minimum threshold under which the death benefit can’t drop.
- Variable-universal life – Combines the premium and death benefit flexibility of universal life insurance with the potential for growth and risks associated with variable life policies.
- Indexed universal life (IUL) – Cash value growth is tied, whether in whole or in part, to the performance of a stock market index like Nasdaq 100 and S&P 500. The rate of return on the cash value has both a minimum and maximum, which limits your gains and losses.
All of the above options have particular risks. For example, insurer fees could drain your cash value and cause your coverage to lapse. If this were to happen later in your life, it could be very difficult or even impossible to purchase another policy with a large-enough death benefit at an affordable price. Always consult a financial planner before opting into a permanent life insurance policy.
| Type | Cash Value | Death benefit | Premium |
| Whole | Growth is fixed and determined by the insurer | Is fixed and guaranteed and beneficiaries receive the whole amount if there are no outstanding loans | Features level premiums but can be up to 15 times more expensive than term life insurance |
| Universal | Growth is based on the current market rate, but there is a minimum rate of return | Can be adjusted by the policyholder, but increases will depend on a medical exam | Are typically less expensive than whole life policies but can vary and may increase as you age |
| Variable Life | Funds can be invested in bonds, stocks or money market mutual funds, allowing for greater gains and potential losses | Is flexible and, depending on the policy, may decrease if the cash value does | Can vary |
| Variable Universal Life | Carries the same possibilities for growth and risks as a universal life policy | Is flexible | Can vary |
| Indexed Universal Life | Growth is tied to a market index, but there minimum and maximum rates of return | Is typically flexible | Can vary |
Permanent vs. term life insurance
Term life insurance policies are simple products that pay out a death benefit if the insured dies within a given term, typically five to 30 years. In contrast, permanent life policies remain active for the life of the insured as long as premiums are paid.
Besides having a death benefit that doesn’t expire, permanent policies also feature a savings component that grows over time. The savings component of permanent policies is called the cash value, and it’s a living benefit that remains with the insurance company upon the death of the insured.
During their lifetime, permanent life insurance policyholders who have enough cash value accumulation can use those funds to cover their premiums, make withdrawals and even borrow against the policy.
However, tapping into the cash value may deplete these savings causing the policy to expire or permanently decrease the death benefit. Policyholders, then, may want to exhaust other options first and monitor their accounts regularly.
Because of their special features, permanent life insurance policies are more expensive than term life insurance. Their cost makes them a suitable option for those who have sufficient disposable income and need a guaranteed death benefit for their dependents or want to use their policies as investment vehicles.
By contrast, those looking into life insurance as temporary income replacement for their loved ones could be better served by purchasing a term life policy.
Regardless of the type of policy you choose, the earlier you purchase coverage the better. Life insurance premiums increase as you age and potentially develop health conditions. Even if you purchased a whole life insurance policy, which features guaranteed premiums, more of your payments would go toward covering the cost of insurance as you age, slowing down the cash value growth.
Read our article on term vs. whole life insurance to learn more.
How to choose the right permanent life insurance
There are plenty of options to choose from when it comes to permanent policies. While we list several of them in this article, insurers may offer different variations of these coverages to suit individual needs. This means that even policies of the same type may be structured a little differently depending on the company.
To choose the right type of policy, consider your needs and why you’re seeking coverage in the first place.
If you’re looking to replace your income while your kids are in school or you’re paying down your mortgage, a term life policy may do. If, on the other hand, you have dependents that will rely on you financially for the long term, a whole life policy will guarantee they receive a death benefit regardless of when you die. Other permanent life insurance options come with greater risks, but could be ideal for those looking to use their policy as an investment.
Experts generally recommend speaking to a financial advisor who can guide you through the available life insurance options and help you choose the policy that best aligns with your financial goals.
How much does permanent life insurance cost?
Depending on the policy you choose, permanent life insurance could be up to 15 times more expensive than term life insurance. On average, monthly premiums range between $40 and $300. That said, actual costs will depend on the underwriting guidelines of the insurance company, the type and level of coverage you choose, any optional riders you purchase and your personal details.
Some of the personal factors that affect your life insurance rates include:
- Age – Premiums are lower when you’re younger and increase in step with your higher death risk as you age.
- Gender – Women generally pay less than men for the same type and amount of coverage, due to their longer life expectancy.
- Medical history – Pre-existing conditions or a history of chronic or hereditary illness in your family will increase the risk for the insurer and, therefore, what you pay for coverage.
- Smoker status – Using tobacco products can decrease your life expectancy by up to 10 years, and you could end up paying as much as 20% more on premiums.
- Hobbies and occupation – High-risk occupations and hobbies increase your risk of death, and life insurance premiums will reflect that.
Best permanent life insurance companies
The following are some of our top picks for the best life insurance companies of the year offering whole life insurance and/or other permanent life insurance types.
| Insurance company | Best for | Types of policies offered |
| Northwestern Mutual | Customization through an extensive variety of policy riders | Term, whole and universal life |
| New York Life | Whole and universal policies underwritten by AARP, and term life options that can be converted to permanent later on | Term, whole and universal life |
| Ethos | Guaranteed issue policies , which are available to anyone regardless of age and health | Term and permanent policies |
Permanent life insurance FAQs
Is permanent life insurance worth it?
Permanent life insurance can be a worthwhile investment for some. Leading candidates are people who can afford higher premiums, have a need for permanent protection and are looking for an additional investment opportunity.
For example, parents of children with disabilities who want to ensure their kids will be taken care of in their absence could benefit from this type of policy in conjunction with a trust. Those looking to tap into the tax-deferred cash value growth of permanent policies may also benefit, including people who want to supplement their retirement income in later years, help children pay for college or buy a home.
How can I change from term to permanent life insurance?
Depending on your insurer and policy, you may be able to convert your term coverage into permanent protection.
Read the details of your term life policy carefully, as not all companies offer this option and some have restrictions around when you can convert. For example, you may only be able to switch to permanent within the first five, 10 or 20 years of the policy's life.
Also, keep in mind that converting a term life policy will entail an increase in premiums (between three and five times more), as permanent policies are generally costlier. This, however, may still benefit you if you have since developed medical conditions that could make obtaining a brand new policy more difficult — and expensive in premiums.
Is permanent life insurance better than term life insurance?
Permanent life insurance isn't necessarily better than term life insurance, but it does have particular advantages that can benefit some individuals.
For the vast majority of people, a term life policy could be enough to replace their income and cover their family's household expenses for a number of years. Others, however, may have a need for guaranteed coverage. If you're among the latter and can comfortably afford whole life insurance premiums, this type of policy can provide you peace of mind.
When should you consider permanent life insurance?
If someone depends on you financially or you have debts that would pass down to your loved ones upon your death, you should consider life insurance — whether term or permanent.
Keep in mind, however, that permanent policies are expensive. Further, not keeping up with payments or depleting the cash value could make the policy lapse, leaving your dependents without a benefit. Consider your budget and needs before opting for a cash value policy and, if possible, consult a financial professional.
Those set on buying a permanent policy should do so while they're younger and healthy and can get the lowest possible premium for the level of coverage they need. Buying a policy earlier in life can also give you enough time to build up cash value within it. Later in life, that value can be used for a variety of purposes.
Since life insurers have different underwriting guidelines, shop around and compare life insurance quotes from multiple companies. It could also help you save money.
Is permanent life insurance taxable?
Permanent life insurance proceeds (death benefits) are tax free, but any interest beneficiaries receive is taxable. Similarly, if you surrender your policy to get back your cash value, your basis (what you've paid into the policy) would be tax-free for you, while any gains on your investment would be taxable. Policy loans don't have tax implications.
Want to learn more? We have a separate article on whether life insurance is taxable.
Summary of our guide to permanent life insurance
Unlike its more affordable counterpart, term life insurance, permanent life insurance provides lifelong coverage. While this type of policy can cost up to 15 times more, it can ensure your loved ones will receive a benefit upon your death, whether that happens in a few years or a few decades.
Permanent policies also have an attractive living benefit: a cash component that grows tax-deferred and which you can utilize in different ways.
Permanent life insurance isn’t a great fit for most people, according to experts. If you’re in the market for life insurance but don’t know exactly which type of insurance product you need, our roundup of the best life insurance companies could help you get started.
Joan is a professional translator, writer and editor with a special interest in personal finance and insurance topics. She has been a contributing author and independent researcher at ConsumersAdvocate.org since 2017 and an editor at Money since 2019. Her work has been featured in MSN Money and Apple News.