Permanent Life Insurance: What Is It and How Does It Work? (2024) (2024)

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Permanent life insurance is exactly what it sounds like: life insurance that is meant to be permanent. Unless you cancel the policy or fail to pay your premiums, permanent life insurance will remain in effect for the rest of your life. It will never expire or require renewal.

Like other types of life insurance, permanent life insurance involves four parties: the policy owner, the insured, the insurer and the beneficiary. The policy owner is the person responsible for paying the premiums, and the insured is the person covered by the policy. In most cases, the insured individual is also the policyholder.

When the insured dies, the insurer agrees to pay a predetermined amount of money to the policy’s beneficiary. This payout is known as the death benefit. Most people name their loved ones, such as spouses, children or parents, as their beneficiaries.

In addition to the policy’s death benefit, or face value, permanent life insurance has a cash value. The cash value can function as a tax-deferred savings or investment account that offers benefits while the policyholder is still alive. Even final expense insurance, with its relatively low death benefit, can accumulate a cash value.

The five main types of permanent life insurance policies are whole, universal, variable, variable universal and indexed universal. These policies differ in a few key ways, including whether the death benefit is adjustable and the level of risk involved in the cash value component.

Whole Life Insurance

A whole life insurance policy, also known as ordinary life insurance, is the most basic option. This policy guarantees the death benefit amount and the rate at which the cash value accumulates. The cash value of a whole life policy does not affect the policy’s death benefit, and the death benefit will remain constant for the entire life of the policy.

The only exception is if the policyholder withdraws a portion of the cash value or takes out a loan against it. Either action will reduce the death benefit unless the policyholder repays the full amount, plus any interest, before their death.

Although the policyholder can access the cash value during her lifetime, that component of the policy reverts back to the life insurance company at death. That means the cash value will not be paid out to the beneficiaries.

Universal Life Insurance

Universal life insurance, also known as adjustable life insurance, offers more flexibility than a whole life policy. With this policy, the policyholder can adjust the premiums and death benefit, though limits and requirements will apply. For instance, increasing the death benefit may require a medical exam, and decreasing the premium payments may only be possible once the cash value has reached a certain threshold.

Although universal life policies generally guarantee a minimum interest rate, they are not insulated from market conditions like whole life policies are. As a result, the growth rate and projected cash value may fluctuate. Because adjustable policies involve slightly more risk, they tend to cost less than whole life insurance.

Universal life insurance is offered in several varieties to suit various financial situations. Here are two popular types:

• Variable Universal Life Insurance: This policy allows the policyholder to increase or decrease their premiums within the limits of a predetermined range. The policyholder can also choose between different investment options the way they would with variable life insurance.
• Indexed Universal Life Insurance: Indexed universal life insurance offers flexible premiums and different investment options. Rather than choosing direct investments, the policyholder chooses an index, such as the S&P 500. This type of policy is a less risky version of variable universal life insurance and typically includes both a maximum and minimum rate of return.

Variable Life Insurance

Variable life insurance offers you more control over the policy’s cash value. The policyholder can choose which stocks, bonds and money market mutual funds to invest in. If those investments perform well, the cash value could grow faster than it would in a whole or universal life policy. Plus, that cash value can be part of the death benefit.

However, this arrangement has a downside. Because the policyholder makes the investment decisions, they also assume all the risk. If their investments perform poorly, the cash value can decrease. The death benefit could be negatively affected, too, though some policies guarantee a minimum payout.

Variable Universal Life Insurance

As the name suggests, variable universal life insurance combines aspects of variable and universal life policies. This policy allows the policyholder to increase or decrease their premiums within the limits of a predetermined range. In this way, it resembles universal life insurance. The policyholder can also choose between different investment options the way they would with variable life insurance.

Variable universal life insurance offers more flexibility than a universal life policy but also carries more risk. Market fluctuations and the policyholder’s chosen investments will affect the cash value and death benefit.

Indexed Universal Life Insurance

Indexed universal life insurance offers flexible premiums and different investment options. This type of policy is a less risky version of variable universal life insurance and typically includes both a maximum and minimum rate of return.

Rather than choosing direct investments, the policyholder chooses an index, such as the S&P 500. The insurance company then sets artificial limits on the rate of return. During a year when the chosen index is up, these limits will seem to work against the policyholder, capping the rate of return below the index performance. However, during a year when the index is down, the limits will work in the policyholder’s favor by insulating the policy’s cash value from loss.

There are several plan types under both the permanent and term life insurance umbrellas with their own pros and cons. However, across the various specific policies, these type types of life insurance differ in three key aspects:

• Coverage length: This difference is evident in the words “term” and “permanent.” A term policy only lasts for a predetermined time period, known as the term. The term could be a certain number of years or until the insured reaches a certain age. Some policies last until a specific debt is paid off, and others are tied to employment or membership in an organization. Permanent policies, however, have no expiration date.
• Cost: Because insurance companies need to cover their own costs, permanent life insurance will cost significantly more than a term policy with the same death benefit. This makes term life insurance an attractive option for those on a tight budget. Policyholders can further limit their out-of-pocket costs by selecting a policy with a shorter term.
• Cash value: Only permanent life insurance policies have a cash value. The cash value offers an additional incentive for the policyholder but also contributes to the higher premiums attached to permanent policies. Over time, the policy’s cash value will grow and become accessible to the policyholder during their lifetime. Term policies, conversely, only offer a death benefit.

It is also worth noting that whole life policies are more likely to require a medical exam and pay dividends than term life policies.

*This life insurance cost calculator estimates the coverage needed based on seven inputs: age, gender, smoker status, annual income, years of income replacement desired, number of children and amount of money in savings. The calculations are based on reasonable assumptions and formulas.

Please note that the calculations provided in this example are for demonstration purposes only and may not accurately reflect actual insurance coverage calculations. Consult with an insurance professional to properly calculate your life insurance needs.

When you pay premiums on your permanent life insurance policy, part of that payment funds your death benefit and part of it covers the insurer’s costs and profits. Another portion funds the policy’s cash value account. Your insurer invests your cash value as described in your policy documents, allowing it to accumulate over time and eventually become available for use before the insured’s death.

However, cash value growth is not always guaranteed. With variable life insurance, the policyholder chooses which stocks, bonds and money markets they want to invest in. While this offers more control over the growth of your money, it also bears more risk. If your chosen investments underperform, the cash value can decrease. The death benefit could be negatively affected, too, though some policies guarantee a minimum payout.

Universal and indexed permanent life insurance policies also offer varying degrees of control over, and risk from, cash value investments.

Permanent life insurance costs will vary depending on your age, health and lifestyle, plus the policy and coverage amount you choose. Some factors that affect cost are within your control, while others are not.

Here are a few things to consider if you would like to minimize the cost of permanent life insurance:

• The younger you are when you apply, the lower your life insurance rates will be.
• Universal and variable policies cost less than whole life insurance.
• The longer you go without smoking, the better your rates will be.
• Many companies factor in your weight or body mass index (BMI).
• Preexisting conditions will affect your rates less if you are actively managing them.
• Frequent international travel and high-risk hobbies can count against you.
• Not all companies use the same formula to calculate risk and rates.

We recommend getting life insurance quotes from at least three providers before you make a choice. This can be especially important if your age or a preexisting condition is likely to weigh against you. As you gather quotes, consider requesting prices for various life insurance products, including both term and permanent policies, so you can compare all your life insurance options.

You should get permanent life insurance if you want to ensure life insurance coverage for the rest of your life rather than for a specific period of time. For instance, a permanent life policy makes sense if you want to leave behind an inheritance or have dependents who will require support no matter their age.

Permanent life insurance is also the right choice if you want more than just life insurance. Unlike the “pure” life insurance provided by a term policy, most permanent policies will accumulate a cash value that you can use during your life. Sometimes, the cash value could even be added to your death benefit.

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Although permanent life insurance costs more than a term policy, it can provide long-term peace of mind and additional benefits. It can also accumulate a cash value over time, which you can use to supplement your retirement income, pay for long-term care or cover other expenses.

However, not everyone needs permanent life insurance. We recommend speaking to a financial professional, such as an estate-planning attorney or financial advisor, to determine the best option for your financial situation.