If you're wondering, "What is permanent life insurance?", here's a quick rundown: If you're seeking life insurance coverage that offers a death benefit and cash value, permanent life insurance is a viable option as designated beneficiaries receive the death benefit upon your passing.
As the policyholder, you may be able to access the cash value, a separate savings component, before your death. You can select from a variety of policy structures according to your financial needs and goals.
Permanent Life vs. Term Life Insurance
Be aware of how permanent life insurance compares with term life insurance, often referred to as "pure life" insurance. The primary goal for both types of life insurance is to provide financial resources after your death for what matters to you — housing or educational costs for the family, funding a cherished cause, etc. The premiums you pay the insurance company go toward those financial payouts.
Note, however, your permanent life premiums also help your policy build cash value. As the insured, you may be able to borrow funds against that value or, under certain conditions, withdraw cash. Another critical difference: Term life insurance promises payment of a specified death benefit for a specific duration. In contrast, permanent life insurance ensures coverage for the lifetime of the insured person — as long as premium payments are in good standing. Finally, permanent life premiums can be higher than those for term life policies.
Categories of Permanent Life Insurance
Among consumers, whole life tends to be the most widely known and simplest form of permanent life insurance. Policyholders are charged a fixed premium and are promised a minimum return on the invested dollars, represented as the cash value of the policy. Universal (also known as adjustable) life insurance offers more flexibility, including the potential to increase the death benefit or alter premium payments under certain conditions.
Variable life and variable-universal life insurance provide the ability to invest the accumulated policy cash in financial market vehicles, such as stocks, bonds and money market mutual funds. This essentially requires taking on more risk with your savings account. However, it's possible to increase the overall value of the policy faster.
Permanent Life Insurance and Retirement
Premium and cash value components differ widely and can be customized via riders to meet a range of financial needs, including retirement planning goals. High tax bracket retirees, for example, may want to tap into the policy cash to cover medical costs or help fund a grandchild's tuition. Some policies can be structured to automatically pay out a monthly income, typically in exchange for higher pre-retirement premiums.
Despite potentially higher premiums, some people may find the cash value options of permanent life policies compatible with their retirement planning. Others, however, prefer other investing tools and don't expect to access the cash value of their life insurance policy. This group will likely focus on a policy — term or permanent life — that optimizes premiums to provide the largest death benefit at the lowest possible cost.
Thinking about whether permanent life can work for you? Determine how much life insurance you need, considering your financial situation and the resources you'll want later in life. Decide on the flexibility you'll need with structuring premium payments. If you find yourself leaning toward a permanent life policy, assess your willingness to take on more risk in exchange for a potentially bigger nest egg.
Keep in mind conditions and requirements. For example, there's a waiting period after the policy purchase during which you can't borrow against the cash value. Also, if you borrow, your policy can be terminated if the total unpaid interest on the loan and the outstanding loan balance exceed the policy's cash value.
Now that you know the answer to "What is permanent life insurance?", here are a few final key takeaways to remember:
- Permanent life insurance lasts the rest of your life — as long as premium payments and other policy conditions are met — and comes with a cash value.
- Premiums will likely be higher for permanent life insurance than for a term policy with the same coverage.
- Policies can be structured to grow the cash value in various ways and may be more practical for higher-income earners.
Keeping these factors in mind will help you decide what type of life insurance plan is right for you.