What is permanent life insurance?
Permanent life insurance is a type of life insurance policy that offers lifelong coverage, as long as you continue to pay premiums to keep your policy active.
Permanent life insurance policies are more expensive than other types of life insurance because they offer a permanent death benefit, as well as a cash value component that may be a source of tax-deferred growth.
There are many different subtypes of permanent life insurance, so it’s best to speak to a licensed insurance agent or financial advisor before choosing a policy.
How does permanent life insurance work?
Each type of permanent life insurance offers slightly different features, but they all:
Pay a death benefit to your beneficiary when you die
Charge premiums to keep the policy active
Provide coverage for life
Most permanent policies also include a tax-advantaged cash value account. When you pay a premium, a portion goes toward the cost of maintaining the policy and administrative fees, and a portion goes toward the cash value. The cash value earns interest over time, though the rate will depend on your specific policy type and insurance company.
If you’re wondering, “How does permanent life insurance work?”, the answer depends on the type of life insurance you purchase. In general, a permanent life insurance policy provides lifelong coverage, pays a death benefit to your beneficiaries, and may build cash value over time.
Most permanent life insurance policies require ongoing premium payments to remain active or an accelerated payment schedule with increased premiums. It is analogous to owning a home via a 30 year mortgage vs a 15 year mortgage. Each premium payment is typically divided between the cost of insurance, policy expenses, and the cash value portion of the policy. Depending on the type of cash value life insurance, the cash value may grow at a fixed rate, track a market index, or be invested in subaccounts.
Some policies also provide a living benefit through access to accumulated cash value while you’re alive. Depending on the policy, loans, withdrawals, missed payments, or underfunding can reduce the death benefit, create tax consequences, or cause the policy to lapse. Before accessing policy value, it’s important to understand how your specific life insurance policy works and what rules are established by the insurance company.
What happens to cash value when you die?
Many people researching permanent life insurance are surprised to learn that the cash value and death benefit are often treated separately.
In most permanent life insurance policies, your beneficiary receives the death benefit when you die, not the accumulated cash value. In many cases, the cash value remains with the insurance company unless your policy includes a specific rider or death benefit option that provides additional payouts. Increasing a universal life policy’s death benefit by it’s cash value will cost more than leaving the death benefit level and allowing the cash value to close the gap. There are benefits and downsides to either design.
Whether you own universal life insurance, variable life insurance, or another type of permanent life, it’s important to understand what your beneficiaries will actually receive.
Before purchasing a permanent life insurance policy, consider asking:
Will my beneficiaries receive only the death benefit?
Can the death benefit increase as cash value grows?
How would policy loans or withdrawals reduce the payout?
What happens to cash value if I surrender the policy?
Understanding these details can help you determine whether a permanent coverage solution aligns with your long-term goals.
What’s the difference between permanent life insurance & term life insurance?
Unlike permanent life insurance, term life insurance only lasts for a set period — usually 10 to 30 years — and then expires.
Term life is one of the most affordable life insurance coverage options on the market and comes with few rules and tax restrictions. It’s best used to provide a financial safety net for your loved ones while they depend on your income.
Permanent life insurance is much more expensive than term life because it doesn’t have an expiration date and it often has a cash value component. Because it’s significantly more expensive, most people don’t use permanent life insurance if their main motivation is finding an affordable policy to protect their family in a worst-case scenario.
Learn more about term life vs. permanent life insurance
Pros & cons of permanent life insurance
Pros
Permanent coverage: A permanent life insurance may cover you for life — subject to the product’s design and guarantees, you may not need to worry about the expiration date on your policy, which can be especially beneficial if you have dependents that will require long-term care.
Cash value: Many types of permanent life insurance offer an additional tax-free cash value portion that can grow over time, which can be useful if you’re already maximizing your contributions to tax-advantaged accounts like a Roth IRA or a 401(k) plan.
Cons
Cost: Permanent life insurance is significantly more expensive than term life, which requires identifying sober assessment of your liquidity needs now and in the intermediate futureIf you can’t afford your policy for its entire duration and it lapses, you risk leaving your family without coverage and losing the money you already paid toward premiums.
Risk of reducing your death benefit: While many permanent life insurance policies allow you to withdraw money from the cash value while you’re alive, you risk depleting the death benefit you’ll leave to your beneficiaries if you can’t pay the money back.
Due to the lower average rate of return within cash value life insurance policies, we usually only recommend these if other investing avenues have already been utilized.
Types of permanent life insurance
The main types of permanent life insurance listed below vary by how the cash value grows, and in some cases, how much coverage you can purchase.
Whole life insurance is the most popular type of permanent life insurance. Cash value accrues interest at a fixed rate over time. Whole life also comes with level premiums, meaning you’ll pay the same amount month over month.
Universal life insurance, also called adjustable life insurance, allows you to make changes to both your premiums and death benefit. You can eventually use your cash value to pay your premiums, if you choose. Types include:
Guaranteed universal life insurance (GUL) is a type of permanent life insurance that comes with fixed premiums, minimal cash value, and a guaranteed death benefit. It’s one of the most affordable types of life insurance you can purchase to get lifelong coverage.
Variable universal life insurance (VUL) combines universal and variable policy features: Your cash value is invested in a fund of your choosing, and your premiums and death benefit can fluctuate.
Indexed universal life insurance is a type of universal life insurance with a cash value that changes based on the performance of a market index or fund, which you choose from a selection offered by your insurer.
Joint life insurance covers two people and is most often bought by married couples with specific estate planning needs. Joint life insurance can refer to first-to-die policies and second-to-die policies, also called survivorship life insurance.
Final expense life insurance is a common type of permanent policy meant to cover end-of-life expenses, like a funeral. These policies come with relatively high premiums for smaller coverage amounts. Simplified issue and guaranteed issue life insurance are two examples of final expense policies.
Learn more about the differences between whole and term life insurance
Learn more about the differences between IUL and whole life insurance
Comparing permanent life insurance policies
How much does permanent life insurance cost?
Premiums vary based on the type of permanent insurance you buy, how much insurance you need, your health and lifestyle, and how quickly you plan to fund the policy. For instance, A 30-year-old could pay $415 to $487 per month for a $500,000 whole life insurance policy that’s paid up at age 100.
You can choose to pay whole life insurance premiums up to a certain age (usually 65, 100, or 121 years old), or over 10 or 20 years. Making payments for a shorter period translates to higher premiums and vice versa.
Whole life insurance rates by age
Methodology: Whole life insurance rates are calculated for male and female non-smokers in a Preferred health classification obtaining a $250,000, $500,000, or $1,000,000 whole life insurance policy fully paid up at age 100 offered through MassMutual. Individual rates will vary as specific circumstances will affect each customer’s rate. Rate illustration valid as of 01/01/2024.
The cost of other types of permanent policies differ more based on your policy features. For example:
Universal and variable universal life insurance don’t have set rates because the policies allow you to adjust your premiums within a lower and upper limit.
Final expense insurance can be costly for low coverage amounts, but has fewer health requirements to apply. A 50-year-old could pay between $52 and $100 per month for a final expense policy with a $25,000 payout, depending on the specifics of their policy.
Below are sample rates for guaranteed issue final expense life insurance.
Final expense insurance rates by age
Methodology: Average monthly rates are calculated for males and females obtaining a $10,000 or $25,000 guaranteed issue whole life insurance policy. Life insurance rates are based on policies offered by Policygenius from Mutual of Omaha. Rates may vary by insurer, policy type, coverage amount, health class, and state. Not all policies are available in all states. Rate illustration valid as of 01/01/2024.
Is permanent life insurance worth it?
Purchasing a permanent policy usually isn’t worth it for many people looking for life insurance due to the high premiums and low returns, which make coverage hard to maintain long-term.
“Due to the lower average rate of return within cash value life insurance policies, we usually only recommend these if other money-saving and investing avenues have already been utilized,” says Patrick Hanzel, advanced planning manager and certified financial planner at Policygenius.
A permanent life policy can be a good fit for people with complex financial needs, including:
People who have maximized contributions to retirement accounts and need an additional vehicle for tax-deferred growth
People with special needs children or other lifelong dependents
High-net-worth individuals who want to provide an income-tax-free death benefit to beneficiaries or create estate liquidity, depending on how the policy is structured.
who have outlived their term life insurance coverage or don’t have enough savings to pay for final expenses such as funeral and burial costs
Most people looking for an affordable way to protect their dependents financially in the event of their death should get a term life insurance policy instead of a permanent life insurance policy.
Purchasing a cheaper term policy and investing your money separately is the best way to get the most bang for your buck.
A Policygenius broker can work with you to determine what the best policy is for your individual circumstance.
Other types of life insurance
Permanent life insurance FAQs
What is the cheapest type of permanent life insurance?
Guaranteed universal life insurance is often one of the most affordable forms of permanent life insurance. Because it focuses primarily on providing a guaranteed death benefit and typically builds little practical cash value, premiums are often lower than those of other permanent life insurance policies.
Does permanent life insurance build cash value?
Most permanent life insurance policies build cash value, but the growth method depends on the policy type. For example, universal life insurance, variable life insurance, and other forms of cash value life insurance each accumulate value differently. Guaranteed universal life may build little to no meaningful cash value.
Is permanent life insurance better than term life insurance?
Neither option is automatically better. Term life insurance is often best for affordable temporary protection, while permanent life insurance may be a better fit for people seeking lifelong coverage, estate planning benefits, or support for lifelong dependents. The right life insurance solution depends on your needs, budget, and goals.
What happens if I cancel permanent life insurance?
If you surrender a permanent life insurance policy, your coverage ends and you may receive the cash surrender value after fees, outstanding loans, or other charges are deducted. Depending on your circumstances, taxes may apply if the surrender value exceeds the amount you paid into the policy.
Can I borrow from permanent life insurance?
Many types of permanent insurance allow policyholders to borrow against available cash value. Loans accrue interest and can reduce the death benefit available to beneficiaries if they are not repaid. In some cases, loans may also create tax consequences if the policy lapses or is surrendered.
