Life insurance comes in various forms to cater to different individuals’ needs. One such type is permanent life insurance, which offers lifelong coverage. As long as the policyholder continues to pay the premiums, permanent life insurance policies never expire.
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What Is Permanent Life Insurance?
Permanent life insurance offers protection for the entire duration of the insured individual’s life. Although it may be costlier than term insurance, permanent policies provide both a death benefit and a savings element that accrues interest on a tax-deferred basis.
There are two main types of permanent life insurance: whole life insurance and universal life insurance. Whole life insurance guarantees a growth in cash value at a fixed rate. On the other hand, universal life insurance offers both savings and a death benefit, with more flexible premium options and earnings based on market interest rates.
Variable life insurance and variable universal life insurance provide additional investment options for the cash value, such as mutual funds and other financial instruments. It is important to conduct thorough research on the insurance firms you are considering to ensure that you obtain the best available life insurance policy for your needs.
Cash Value Within Permanent Life Insurance Policies
When you pay your premiums for a permanent life insurance policy, some of that money is allocated towards a cash value account. Once you accumulate enough cash value, you have the option to borrow against it or withdraw it.
However, if you have used up all your cash value and there is insufficient funds within the policy to cover policy charges, you may need to pay additional premiums to avoid the policy from lapsing.
If you borrowed money from the cash value of your permanent life insurance policy but have not repaid it, the loan amount and interest will be taken out of the death benefit if you die.
If you no longer wish to keep your permanent policy, there is a possibility that you can receive some cash value. In the event that you terminate the policy, the insurance company will provide you with the cash value after deducting any surrender charge.
What are the different types of permanent life insurance policies?
If you have specific needs, you have the option to select a different form of permanent life insurance policy. The following are the primary kinds of permanent life insurance:
Whole life
Whole life insurance is a popular choice among individuals seeking long-term coverage. This policy provides protection for your entire life, ensuring that your premiums remain consistent regardless of any changes in your age or health.
As long as you continue to make payments, you will maintain the same level of coverage. Additionally, with a whole life insurance policy, you have the opportunity to accumulate cash value, which can serve as a valuable financial resource as you strive to achieve your goals.
Universal life
When you have a permanent life insurance policy, such as universal life insurance, you will be provided with a death benefit that will cover you for your entire life. Additionally, your policy will also accumulate cash value over time.
The advantage of this type of policy is that you have the freedom to adjust your premium payments each year, as well as increase or decrease the amount of your death benefit (within certain limits). While this flexibility can be beneficial, it is crucial to consult with a financial advisor to ensure that any changes you make align with your overall financial goals and requirements.
Variable universal life
Permanent life insurance policies provide a valuable option for individuals seeking long-term coverage. One particular type of permanent life insurance is variable universal life insurance, which offers the added advantage of increased flexibility in managing the cash value component.
With variable universal life insurance, policyholders have the option to invest their cash value in sub-accounts that are directly linked to the market. This investment opportunity allows the cash value to potentially grow at a higher rate compared to other types of permanent life insurance policies. However, it is important to note that due to the market ties, there is also a possibility for the cash value to decrease in value.
Understanding Permanent Life Insurance
Unlike term life insurance, which provides coverage for a specific duration, permanent life insurance offers lifelong protection. As long as the policyholder keeps up with the premium payments, this type of insurance remains in effect throughout their entire lifetime.
Premiums for permanent life insurance pay for the death benefit of the policy and also help in accumulating cash value over time. As a policyholder, you have the option to borrow against the cash value through a policy loan or withdraw cash directly to use for various purposes such as medical expenses or funding your child’s education.
When a policyholder takes out a loan against the cash value of their insurance policy, the insurer will apply interest to the outstanding loan amount. If the combined total of unpaid interest and the outstanding loan balance surpasses the policy’s cash value, the insurance policy will be terminated, leading to the loss of all coverage.
Permanent life insurance policies receive advantageous tax treatment. The cash value of these policies typically grows in a tax-deferred manner, meaning that policyholders are not required to pay taxes on their earnings as long as the funds remain within the policy.
Additionally, certain amounts of money can be withdrawn from the policy without being subjected to taxation. Specifically, withdrawals up to the total amount of premiums paid are typically not taxed. However, it is important to note that withdrawing cash value from a permanent policy through a withdrawal or outstanding loan will diminish the future death benefit that will be received by the policyholder’s beneficiaries.
Permanent Life Insurance vs. Term Life Insurance
Every individual has unique insurance requirements that change throughout their lifetime. Whole life insurance and permanent insurance both offer a death benefit as long as you regularly pay your premiums. Although term life insurance is favored for its lower premiums, it usually only covers you for a specific period of time before expiring. However, you can often extend your term coverage once the initial period is over, but this will result in higher premiums.
Many young families opt for term insurance as it offers coverage until they are able to pay off their debts and save enough money, making the need for a large life insurance policy unnecessary. However, there are individuals who might choose to have the continuous coverage and savings options that come with a permanent life insurance policy.
Due to various factors, a number of term life insurance policies provide the opportunity to convert the coverage into a permanent policy at a later stage. This conversion can usually be done without requiring the policyholder to undergo medical exams or meet other qualification criteria.
This feature can be particularly attractive for individuals who have health problems, as it can prevent the cost of obtaining a new policy from becoming unaffordable. Additionally, individuals with chronic conditions that may necessitate ongoing expenses from the savings portion of the policy can also benefit from this conversion option.
Although permanent life insurance comes with higher premiums compared to term coverage, individuals who opt for permanent policies typically have accumulated sufficient wealth at that point in their lives to afford the increased costs. In addition to the potential for saving money, permanent life insurance can also serve as a tax-advantaged investment option to provide for lifelong dependents or for the purpose of estate planning.
Advantages and Disadvantages of Permanent Life Insurance
There are advantages and disadvantages to buying permanent life insurance. If you have the financial means to pay for the higher premiums, permanent life insurance offers the flexibility of providing your beneficiaries with a death benefit without the limitations of term life insurance.
With a permanent life insurance policy, you have the opportunity to build savings in an account that comes with tax advantages. Additionally, you have the option to borrow from or withdraw funds from this account during the duration of the policy.
However, it is important to note that there are drawbacks to purchasing permanent life insurance. These include the high costs associated with premiums, the risk of not being able to afford the ongoing payments, and the fact that withdrawing cash from the policy’s value will reduce the death benefit.
Can You Cash Out Permanent Life Insurance?
Certainly, it is possible to receive funds from permanent life insurance after it has been active for a considerable period. There are a few options available for accessing the funds, such as taking a loan against the policy, withdrawing money from the cash value, or surrendering the policy altogether. However, surrendering the policy may require payment of surrender fees and taxes on the withdrawn amount.
Who should get permanent life insurance?
Permanent life insurance is a type of insurance that can be advantageous for individuals of all ages. It is worth noting that obtaining a life insurance policy for your children can also offer numerous benefits.
It is important to remember that the earlier you secure a permanent policy, the more likely you are to enjoy lower premiums. By getting a permanent policy at a young age, you can potentially secure affordable rates for yourself or your children throughout their lives.
Due to the higher cost of permanent life insurance in comparison to term policies offering the same death benefit, many individuals opt to purchase a combination of both. Certain term policies even provide the option to convert them into permanent policies at a later date without the need for underwriting.
If you are looking for life insurance coverage that provides a death benefit that lasts for your entire life and the option to grow cash value over time, then permanent life insurance could be the right choice for you. Consulting with a financial advisor will assist you in finding the most suitable policy for your needs and ensure it aligns with your overall financial goals.
How Long Does Permanent Life Insurance Last?
A permanent life insurance policy ensures coverage for your entire lifetime as long as you consistently pay the premiums and do not cancel or surrender the policy.
Bottom Line
Permanent life insurance is a type of insurance that provides a guaranteed payout when the insured person passes away. Unlike term insurance, permanent life insurance policies also include a savings component known as cash value.
This cash value earns interest and grows without being subject to taxes as long as the policy is active. Another advantage of permanent life insurance is that you have the option to withdraw or borrow against the cash value while you are still alive.