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Types of Life Insurance
Types of life insurance overview
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Universal life insurance
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Final expense life insurance
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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, sometimes called cash value insurance , is an umbrella term for several types of life insurance that don’t expire. It’s one of the two main types of life insurance, alongside term life insurance. Permanent insurance remains active as long as you pay the premiums. Most forms of permanent life insurance also have a savings-like cash value that grows over time.
Despite these advantages, permanent life insurance isn’t recommended for most people because it’s significantly more expensive and complicated than term life insurance. Permanent policies are best for high-income earners or people with lifelong dependents.
Permanent life insurance encompasses multiple types of life insurance with no expiration date
Most permanent insurance comes with an investment-like cash value component that grows tax-deferred
Premiums are significantly more expensive than term life insurance for the same coverage amount
Only people with permanent financial dependents or a high net worth should consider a permanent policy
Permanent life insurance is any life insurance policy that provides coverage for your entire life. Though each type of permanent life insurance offers slightly different features, they all:
Pay a death benefit to your beneficiary in the event of your passing.
Charge monthly or annual premiums to keep the policy active. The coverage stays in place for life, provided you keep paying your premiums.
Most permanent policies also put a portion of your premiums into a tax-deferred cash value component, which grows over time. (The exact portion is determined by your individual policy.) However, final expense insurance , which is intended primarily for end-of-life expenses, does not.
Because of the long coverage period and cash value, permanent life insurance premiums are much higher than the premiums you’d pay for a term life insurance plan with the same death benefit amount.
A term life policy, which is meant to last only as long as your dependents rely on your income, is best for most people due to its affordability and flexibility. 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 and are seeking an additional vehicle for tax-deferred savings.
People with special needs children or other lifelong dependents.
High net-worth individuals who want to create a tax-free inheritance for their children or offset the costs of an estate tax on their assets.
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The different types of permanent life insurance mainly vary in how they treat the cash value of your policy. The outliers, simplified issue and guaranteed issue life insurance, only offer death benefits up to $50,000 with no cash value and are best for those who don’t qualify for traditional life insurance.
Whole life insurance is the most common type of permanent life insurance. The cash value grows at a modest rate (with a guaranteed minimum) and premiums stay level for the duration of the policy. Depending on your provider, your whole life policy may receive dividends that could increase both your 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. The rate of growth is subject to change, rather than fixed.
Variable universal life insurance combines universal and variable policy features: Your cash value is invested in a fund of your choosing and your premium and death benefit can be changed at any time.
Final expense insurance includes simplified issue and guaranteed issue insurance and is intended for those who need to cover end-of-life expenses or who don’t qualify for traditional coverage. Policies are offered at smaller coverage amounts, usually between $10,000 and $50,000.
While many permanent policies include a guaranteed rate of growth on your cash value, the funds usually generate a low rate of return. Most people will get greater and more reliable investment growth from standalone investment accounts.
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.
According to Policygenius quoting data in January 2021, 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.
Your permanent life insurance premiums will vary based on the type of permanent insurance you buy, your health and lifestyle, and depending on how quickly you plan to fund the policy. Most providers give you the option to pay premiums up to a certain age (usually 65, 99, or 121 years old), or less commonly, over 10 or 20 years. Funding your policy over a shorter period translates to higher premiums and vice versa.
A permanent life insurance policy won’t do you or your beneficiaries much good if your policy lapses, so make sure you budget for the high premiums and any unexpected financial setbacks, like unemployment or medical emergencies.
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. Term life insurance coverage is usually the best policy option for most people because it offers the same amount of coverage or more at a lower cost.
Take a look at the table below, which compares the monthly cost of a 20-year term policy, a whole life policy, and two final expense policies for a 50-year old male:
|POLICY||DEATH BENEFIT||MONTHLY PREMIUM|
Note that the term policy provides more than twice the death benefit amount than each of the permanent policies for a fraction of the cost. Premiums for universal, variable, and variable universal life policies depend on your policy, as well as fluctuations in your cash value.
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Permanent policies offer the same amount of coverage as term life insurance for costlier premiums, which results in a high rate of policy lapse. Because they're also not an ideal investment vehicle, purchasing a permanent policy usually isn't worth it except in a few circumstances.
“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 life insurance offers the following advantages:
A guaranteed payout for life
Cash value growth
Potential for liquidity
Tax and estate planning benefits
However, the downsides of permanent insurance include:
High premiums for comparatively smaller benefits
Smaller investment gains than traditional investing
Unpredictable cash value growth
Taxes and fees attached to cash value
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 lifelong 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 determine what the best policy is for your individual circumstance.
Permanent life insurance is any life insurance policy without an expiration date. Many permanent policies also have a cash value savings component.
People who will financially support someone else into old age or who have a high net worth could consider permanent life insurance, but most people only need term life insurance.
Whole life, universal life, variable life, variable universal life, and final expense insurance are the types of permanent life insurance.
Permanent life insurance premiums depend on the type of permanent policy you own and by when you expect to fund the policy, but they’re five to 15 times higher than term life premiums for similar coverage amounts or lower.
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