By Tempail 
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.
Understanding Permanent Life Insurance
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.
Key Elements of Permanent Life Insurance
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.
Types of Permanent Life Insurance
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
Permanent Life Insurance vs. Term Life Insurance
There are several plan types under both the permanent and term life insurance umbrellas with their pros and cons. However, across the various specific policies, these types of life insurance differ in three key aspects:
- Coverage length
- Cost
- Cash value
It is also worth noting that whole life policies are more likely to require a medical exam and pay dividends than term life policies.
How Does Cash Value Accumulate in a Permanent Life Insurance Policy?
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.
How Much Does Permanent Life Insurance Cost?
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.
Who Should Get Permanent Life Insurance?
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.
The Bottom Line
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.
For more insights and personalized recommendations, consult with a life insurance expert.
Frequently Asked Questions About Permanent Life Insurance
What are the main types of permanent life insurance?
- Whole life
- Universal life
- Variable universal life
- Variable life
- Does permanent life insurance build cash value?
Here’s a summary of “What Is Permanent Life Insurance?”
Permanent life insurance is a type of life insurance that remains in effect for your entire life as long as you continue paying premiums. It involves the policy owner, the insured, the insurer, and the beneficiary. When the insured person dies, the insurer pays a predetermined amount (death benefit) to the beneficiary.
There are five main types of permanent life insurance:
- Whole Life Insurance: Basic and guarantees the death benefit and cash value accumulation rate. Cash value doesn’t affect the death benefit unless withdrawn or used as a loan.
- Universal Life Insurance: Offers more flexibility in premiums and death benefits but is subject to market conditions.
- Variable Life Insurance: Allows the policyholder to choose investments, impacting cash value growth and risk.
- Variable Universal Life Insurance: Combines aspects of variable and universal policies, offering flexibility and investment control.
- Indexed Universal Life Insurance: Less risky than variable types, allows choosing an index for investment with capped returns.
Permanent life insurance costs more than term life insurance and accumulates a cash value over time. Factors affecting cost include age, health, lifestyle, and policy type. It’s suitable for those wanting lifelong coverage, cash value growth, and additional benefits.
Here are a few FAQs about permanent life insurance:
- What is the difference between universal life, whole life, variable universal life, and variable life?
- Does permanent life insurance build cash value?
- What are the benefits of permanent life insurance?
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