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Types of life insurance overview
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Permanent life insurance offers lifelong coverage and builds cash value, but the high cost of premiums means it’s not a good option for most people.
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Permanent life insurance is an umbrella term for several types of life insurance policies that don’t expire, including whole life insurance. It is meant to provide lifelong coverage and permanent insurance policies remain active for as long as you pay the premiums.
In addition to offering lifelong coverage, most forms of permanent life insurance also build cash value over time. Permanent insurance, therefore, acts as a kind of savings or investment account, but one that also pays out a death benefit to your family if you should die prematurely.
However, despite these advantages, permanent life insurance policies aren't recommended for most people because it’s significantly more expensive (and more complicated) than term life insurance. Read on to see whether a permanent policy makes sense for you.
Permanent life insurance is any life insurance policy that is intended to provide coverage for your entire life. Unlike term life insurance, which lasts for a set period of time then expires, permanent life insurance policies remain active for as long as you pay your premium.
Though each type of permanent life insurance offers different features, most have the following in common:
All permanent life insurance policies pay out a death benefit — usually a tax-free lump sum of money—to your beneficiary (or beneficiaries) in the event of your death.
You’ll pay monthly or annual premiums to keep the policy active. The policy will cover you for life, provided you keep paying your premiums.
Each month, a certain portion of your premium payments will go into a tax-deferred savings component, called the cash value of the policy. (The exact amount that goes into savings is determined by your individual policy.) The policy's cash value grows over time.
Since permanent life insurance is guaranteed to pay out eventually, permanent life premiums are much higher than the premiums you’d pay for a term life insurance plan with the same death benefit amount.
Whole life insurance is the most common type of permanent life insurance. The cash value of a whole life insurance policy usually grows at a modest interest rate and premiums stay level for the duration of the policy. They also have minimum rates built into the contracts, so the performance of the policies are guaranteed to not drop below those. Depending on the type of life insurance company the policy is with, these policies can have the potential to receive dividends which could increase both the cash value and death benefit.
Variable life insurance lets you invest the cash value of your policy in a selection of funds offered by your insurer. The growth of the policy’s cash value is tied to broader market trends, which means that it could potentially grow faster than the cash value of a whole life policy, but is also vulnerable to market fluctuations.
Universal life insurance allows you to change your policy’s premium and death benefit amounts without getting a new policy. You can also use the cash value of the policy to pay the premium.
Final expense insurance is a permanent life insurance policy for seniors. It’s used to cover funeral and burial costs and any end-of-life expenses such as outstanding debts. Policies are offered at smaller coverage amounts, usually between $10,000 to $50,000.
A term life policy, which is meant to protect your dependents only for the time period when they rely on your income, is sufficient for most. But a permanent life policy can make sense for people with complex financial needs, including:
High-income earners who have already maxed out their other retirement accounts, such as their 401(k) and Roth IRA, and are seeking an additional vehicle for tax-deferred savings.
People with special needs children or other lifelong dependents.
High net-worth individuals who are looking to build a tax-free inheritance for their children or offset the costs of an estate tax on their assets.
Seniors 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.
According to Policygenius quoting data in September 2020, permanent life insurance policies, such as whole life, typically cost five to 15 times more than term life insurance for the same death benefit amount.
According to one study, about 45% of people who purchase whole life insurance surrender their policies within the first 10 years due to the high cost of premiums. Permanent life insurance policies won’t do you or your beneficiaries much good if your policy lapses, and common financial setbacks, like unemployment or medical emergencies, can affect your ability to pay high premiums.
Permanent life insurance and term life insurance both offer important financial security to your loved ones if you die, but are otherwise very different. Permanent policies are exactly what they sound like: permanent. The coverage lasts your entire life, whereas a term life insurance policy only lasts for a set period of time.
The longer term length and the cash value component offered by most permanent life insurance policies is what makes it costlier than term life insurance — and often even unaffordable. Term life insurance coverage is usually the best policy option for most people because it offers the same amount of coverage at a lower cost.
Take a look at the table below, which compares the monthly cost of a 20-year term policy with a $250,000 death benefit to the monthly cost of a whole life policy (a type of permanent life insurance) with a $100,000 death benefit for a healthy male at different ages:
|Age||Term ($250,000)||Whole ($100,000)|
The above information is based on quote averages of policies offered by Policygenius as of September 2020. Quotes provided by our 11 partner life insurance companies: AIG, Banner, Brighthouse, Lincoln, Mutual of Omaha, Pacific Life, Principal, Protective, Prudential, SBLI, and Transamerica.
Note that the term policy provides more than twice the death benefit amount that the whole life policy does for a fraction of the cost.
Like term life insurance, a permanent life insurance policy creates a financial safety net for your dependents in the event of your death. That includes protecting your family from any debts you leave behind, such as a mortgage or student loans, and covering end-of-life expenses, such as funeral and burial costs.
Permanent life insurance also offers the following advantages:
Permanent life insurance never expires, so you won’t outlive your policy as long as you keep paying your premiums. When you’re covered by a permanent life insurance policy, your beneficiaries are guaranteed to receive a payout no matter when your death occurs.
Because the cash value of a permanent life policy comes out of the premiums you pay and grows over time, it acts as a “forced” savings vehicle. And depending on your policy and how much cash value it’s built up, you may be able to use the cash value to pay your premiums, or take out a low-interest loan against your policy.
However, both of these options come with some risk: if you die before you repay your loan, the amount you owe will be deducted from your death benefit. And if you use up all of your policy’s cash value to pay your premiums, your policy will lapse.
The cash value of a permanent life policy grows tax-deferred, meaning that you won’t pay any taxes on your savings as they grow over time.
You can usually also withdraw money tax-free from the cash value of your policy. However, if you completely surrender your policy or your policy lapses, any money you’ve withdrawn over your basis (that is, the portion of the cash value that comes from your premiums) will be taxed as income.
The high cost of permanent life insurance policies make it an unaffordable life insurance policy for most people. Premiums are exponentially costlier for the same amount of coverage that you could get with a term policy, and the costly premiums often end up leading to policy lapses.
The high cost of a permanent policy is only suitable for individuals with certain circumstances, such as someone with a long-term dependent. People who only need a standard form of life insurance to protect them for a set number of years can get more coverage for less money with a term policy.
Though permanent life policies do build cash value, that cash value comes with limited investment options and relatively low rates of return. Over the long run, dedicated investment options—such as a mutual fund, 401(k), or IRA—will likely provide better returns than a permanent life insurance policy. For example, data from permanent life insurance policies offered by Policygenius show that the long term rate of return on a whole life policy can be around 3-4%, while the rate of return on alternative investments averages much higher.
“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 Specialist and Certified Financial Planner at Policygenius. “Purchasing a term insurance policy and investing the difference in premiums should yield you a higher return in the long run.”
Permanent policies offer the same amount of coverage for exponentially costlier premiums which results in a high rate of policy lapses. Because they're also not considered an ideal investment vehicle, purchasing a permanent policy usually isn't worth it in the long run.
Most people should consider purchasing a term life insurance policy as opposed to a permanent life insurance policy unless they have a high net-worth or life long dependent. Purchasing a term policy and investing the difference is the best way to get the most bang for your buck. A Policygenius broker can work with you for free to help you determine what the best policy option is for your individual circumstance.
Nupur Gambhir is a life insurance editor at Policygenius in New York City. She has researched and written extensively about life insurance since 2019, with specialties in life insurance companies, policy types, and end-of-life planning. Her writing on insurance and finance has appeared on MSN, The Financial Gym, and end-of-life planning service Cake. Previously, she worked in marketing and business development for travel and tech.
Nupur has a B.A. in Economics from Ohio State University.
Patrick Hanzel is a CERTIFIED FINANCIAL PLANNER™ on the advanced planning team at Policygenius. He has eight years of insurance and financial industry experience and previously worked at Northwestern Mutual as an advisor and associate. His expertise has been featured on Lifehacker, Consumer Affairs, Authority Magazine, and Thrive Global.
Patrick has a degree in Business Administration from Nebraska Wesleyan University, where he was also a member of the golf team.
Patrick is a CERTIFIED FINANCIAL PLANNER™ (CFP). He has completed FINRA Series 6 (Investment Company and Variable Contracts Products Representative), Series 7 (General Securities Representative), and Series 63 (Uniform Securities Agent State Law) examinations.
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