Cost & Coverage
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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.
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.
In addition to offering lifelong coverage, most forms of permanent life insurance also build cash value over time. Permanent life 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 isn’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.
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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. (See the final section for more about the different types of permanent life insurance). 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 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.
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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 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.
For high net-worth individuals, a permanent life policy can also be a way to leave a tax-free inheritance for your children, particularly if your assets will be subject to an estate tax.
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.
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 (with a $100,000 death benefit) for a healthy male at different ages:
|Age||Term ($250,000)||Whole ($100,000)|
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.
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 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.
Though permanent life policies 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, 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.”
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.
Whole life insurance is the most common form 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 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 permanent life insurance 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.
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