What Is Permanent Life Insurance?
Permanent life insurance is a type of coverage that offers protection for the entire lifetime of the insured individual. While it may have higher costs compared to term insurance, permanent policies provide a combination of a death benefit and a savings component that accumulates interest on a tax-deferred basis.
The two main types of permanent life insurance are whole life and universal life. In whole life insurance, the cash value grows at a guaranteed rate. On the other hand, universal life insurance offers flexible premium options and its earnings are tied to market interest rates. Additionally, there are variations like variable life and variable universal life that allow for investment of the cash value in mutual funds and financial instruments.
When selecting the right policy for your needs, it is essential to conduct thorough research on the insurance companies being considered to secure the best available life insurance.
Key Takeaways:
- Permanent life insurance provides coverage that does not expire, unlike term life insurance.
- Most permanent life insurance policies combine a death benefit with a savings component.
- Whole life and universal life insurance are the primary types of permanent life insurance.
- Life insurance policies enjoy favorable tax treatment.
- Premiums for permanent life insurance are higher than term life insurance due to the savings component.
Understanding Permanent Life Insurance
Unlike term life insurance that covers a specific period, permanent life insurance provides coverage throughout the insured’s lifetime as long as premiums are paid.
The premiums for permanent life insurance serve to fund the policy’s death benefit and help in building cash value. Policyholders can access funds through policy loans or cash withdrawals to address needs such as medical expenses or education costs.
Insurers charge interest on outstanding cash value loans, and if the accumulated interest and outstanding balance exceed the policy’s cash value, the policy and coverage may terminate.
Permanent life insurance policies offer tax benefits, with cash value growing tax-deferred. Withdrawals up to the total premiums paid are generally tax-free. However, accessing cash value through withdrawals or loans can reduce the future death benefit for beneficiaries.
Many term life insurance policies provide the option to convert coverage to permanent life insurance before the term ends.
Permanent Life Insurance vs. Term Life Insurance
Different insurance needs arise at different life stages. While both whole life and permanent insurance offer a death benefit, term life insurance has lower premiums but expires before the insured’s lifetime. Term coverage can be extended, but premiums will rise.
Term insurance is popular for younger families to cover debts and accumulate savings, while others may prefer permanent policies for ongoing coverage and savings opportunities.
Many term life policies allow conversion to a permanent policy without new medical exams or qualification standards, which can be beneficial for individuals with health issues or chronic conditions.
Permanent life insurance premiums are higher than term coverage, but offer long-term benefits and savings opportunities that are suited for those with financial stability.
Advantages and Disadvantages of Permanent Life Insurance
Permanent life insurance has pros and cons. While it provides a death benefit with a savings component and tax advantages, the premiums are costly, which can be a challenge for some individuals. Accessing the policy’s cash value can also reduce the death benefit.
High premiums, payment affordability, and potential death benefit reduction are factors to consider when buying permanent life insurance.
What Is Permanent Policy Life Insurance?
Permanent life insurance is a policy that remains effective until the policyholder’s demise and often includes a cash value savings component.
What Are the Four Types of Permanent Life Insurance?
The four main types of permanent life insurance are universal life, whole life, variable universal life, and variable life.
What Is Better, Term or Permanent Life Insurance?
Both term and permanent life insurance offer financial protection, but the choice should align with affordable premiums. Permanent life insurance lasts longer and includes a cash value element, albeit with higher premiums compared to term insurance.
Can You Cash Out Permanent Life Insurance?
Yes, permanent life insurance can be cashed out after a few years. You can take a loan against the policy, withdraw cash from the cash value, or surrender the policy, though surrendering may incur fees and taxes.
How Long Does Permanent Life Insurance Last?
If premiums are paid as required and the policy is maintained, permanent life insurance will remain in force for the policyholder’s lifetime.
The Bottom Line
Permanent life insurance offers a guaranteed death benefit, alongside a cash value component that grows tax-deferred with potential to withdraw or borrow while alive. However, the premiums are substantially higher compared to term insurance.