Permanent Life Insurance Explained

Permanent life insurance policies, such as whole and variable life insurance, provide lifelong coverage and usually contain a cash value component. 

Purchasing a permanent policy is an excellent way to ensure your loved ones are financially secure. However, it comes with expensive premiums, so not everyone can afford it.  

In this blog post, we will explain everything about permanent life insurance to help you understand whether it’s worth the investment. So, without further ado, let’s get to the topic. 

Permanent Life Insurance Definition

True to its name, a permanent life insurance policy is an insurance policy that lasts the policyholder’s lifetime. 

It has several features and aspects that make it better than term life insurance. For instance, your permanent life insurance adds a savings element to your policy along with a death benefit. In addition, you can withdraw funds up to the amount you have paid in premiums. 

It’s a feasible and financially appropriate solution for securing your family’s future. Plus, cash value allows you to earn interest on your policy. However, note that you’ll be able to withdraw cash value only when your policy has been active for a specific period mentioned in the contract. 

Permanent life insurance is tax-free, meaning the amount you accumulate is non-taxable until the policy is active. However, taxation might apply when you withdraw your money. Therefore, if you pay permanent life insurance premiums for 50 years, your money will not be subject to tax until you withdraw it. 

There is often a waiting period when you purchase a permanent life insurance policy. During this time, you cannot withdraw funds from your savings portion until sufficient cash gets accumulated in your account. 

In addition, permanent life insurance enjoys several tax benefits. For instance, the savings portion of your permanent life insurance policy is free from tax. Moreover, if certain premium limits are adhered to, you can withdraw money from the savings portion of your permanent life insurance policy without having to pay tax. 

Once you have decided to purchase permanent life insurance, research the firms you are considering to find the best rates possible. 

Permanent Life Insurance vs Term Life Insurance

Most people don’t think about getting life insurance. But it’s essential for you and your family. After all, when you are no longer there to financially support your family, how will your children look after themselves? These thoughts may scare you. However, you won’t spend your nights thinking about accumulating money for your children if you have a backup plan.  

Therefore, different life insurance policies are available to help out your family if you pass away. Among several policies, term and permanent life insurance are the most common ones. So, let’s talk about them in detail. 

Term life insurance is ideal for those mainly looking for temporary coverage. The premiums on term life insurance are lower than permanent life insurance. In addition, if you die during the policy term, your beneficiaries will receive a death benefit. However, if you outlive the policy term, your beneficiaries won’t get any money.

On the other hand, permanent life insurance is slightly different. Firstly, the premium for permanent life insurance is much higher than term insurance. After all, a portion of your permanent life insurance premium goes towards savings, which you can withdraw after a specific period.

Secondly, permanent life insurance is free from taxation, and if you adhere to certain premium limits, you won’t have to pay taxes on the amount you withdraw. 

Permanent life insurance is a policy that offers death benefits alongside its savings element. For example, you can pay for home expenses, your children’s college, and weddings through permanent life insurance. 

In addition, your policy won’t end unless you stop making premium payments, which makes permanent life insurance slightly better than term life insurance. However, the payment period for permanent life insurance lasts the insurer’s lifetime, so you have to deduct a portion of your earnings for your insurance as long as you are alive. 

Pros and Cons of Permanent and Term Life Insurance

From a financial perspective, both insurance policies are excellent for securing your children’s future. However, permanent and term insurance policies have their pros and cons. 

Term Life Insurance Pros	Term Life Insurance Cons
It’s one of the least expensive insurance policies you can purchase.  Your beneficiaries will get a larger death benefit.  If you buy this insurance at a young age, you’ll pay lower monthly premiums.	If you have health issues, it won’t be easy to qualify for a term insurance policy.  Your premiums may increase when you decide to take out a new term policy.

 

Permanent Life Insurance Pros	Permanent Life Insurance Cons
You can build cash value within your policy as long as you continue to pay your premiums.  You can maintain insurance coverage for life. However, if you surrender the policy, you will receive some if not all the cash value you have paid to date.  Withdrawing from the savings portion of your permanent life insurance policy is tax-free.	You’ll have to pay higher premiums compared to term life insurance.  Payment for premiums will remain unchanged even if your household income decreases.

Basic Features of Permanent Life Insurance Policy

Permanent life insurance is a way of securing your family’s future and leaving them an inheritance they can use to improve their financial position. Here are some of the basic features of permanent life insurance policies. 

• Cash Value 

One of the prime features of a permanent life insurance policy is the cash value. It’s the only policy that allows the insured person to accumulate cash value alongside a death benefit. You can also borrow an amount equal to your policy’s cash value as a loan. If you don’t return the amount, it won’t affect your credit score. Instead, it will be deducted from your death benefit. 

In addition, if the policyholder passes away, the beneficiaries will only receive a death benefit, and the insurance company will keep the cash value amount. 

• Coverage for Life 

True to its name, a permanent life insurance policy will last the policyholder’s lifetime. The only time the policy ends is when the policyholder cancels the coverage or passes away. 

• Tax Benefits

The cash value that accumulates alongside your death benefit is tax-free. As long as the policy is active, the money you are saving within your insurance will not be tax-deductible. Many policyholders use the cash value to pay their insurance premiums later in life, creating a cycle of payments where they don’t have to pay out of pocket. 

In addition, tax is not deducted from the cash value when you cancel your permanent life insurance policy unless you receive a greater amount than you invested. 

• Pre-Planned Inheritance 

If you always wanted to enjoy the high life and live in exotic places but couldn’t find the finances to do so, you can leave an inheritance for your future generation. 

Leaving a pre-planned inheritance can help your children get a head start in life as they will have a significant sum of money waiting for them when you pass away. Call it a goodbye gift or a push for your children to start their own business and live a comfortable life. 

Only permanent life insurance can allow this opportunity. 

• Constant Premiums

Unlike term life insurance, where the premium payment rate increases every time you have to renew the policy, permanent life insurance premiums remain constant. Therefore, even though permanent life insurance premiums are quite high, this option is still appealing to people striving to improve their financial position. 

Types of Permanent Life Insurance Policies 

If you are shopping for a permanent life insurance policy, there are many options to choose from. Your decision depends on your ability to take risks and how much flexibility you desire from your policy. 

Here are different types of permanent life insurance policies you can consider. 

• Whole Life Insurance 

Whole life insurance is a standard permanent insurance policy, which contains cash value. The insured has to pay a fixed premium monthly or yearly. 

You can opt for a loan against the cash value accumulated under the whole life insurance policy and pay for personal expenses. However, if you can’t return the borrowed amount, your death benefits might decrease. 

When you die, your beneficiaries will receive the face value of the policy, not the cash value. 

• Universal Life Insurance 

The main advantage of the universal life insurance policy is the flexibility you get in terms of premium payments. For instance, you can adjust your premium payments based on your financial situation. As long as they are within the maximum and minimum range mentioned in the insurance policy contract, your insurer will have no issue with your fluctuating payments. 

In addition, universal life insurance policies allow the insured person to combine cash value and death benefits. However, this insurance policy is more expensive than other options. 

Indexed universal life insurance policies are tied with the stock market indexes, such as the S&P 500 and other top exchanges, allowing the insured to profit over the insurance amount. 

• Variable Life Insurance

Variable life insurance is riskier than whole life insurance. With variable life insurance, policyholders have the opportunity to put their cash value in an investment account managed by the insurance company. Once investments make a profit, the amount can be used towards your premiums or get added to your death benefit. However, if your investment doesn’t go as planned, you won’t have the money to put towards premiums, and the death benefit may decrease. 

Luckily, companies usually have a guaranteed minimum death benefit, which means you won’t die, leaving your loved ones empty-handed. Variable life insurance is just a way to multiply your life insurance earnings through investments. 

• Variable Universal Life Insurance 

What do you get when you mix universal and variable life insurance? You get variable universal life insurance. 

You can adjust your premium payments anytime and use your money for investment purposes. However, this increased flexibility comes at a risk. If your investments don’t return a profit, you might end up owing money to your insurance company or even lose the coverage. 

Permanent Life Insurance Cost

The permanent life insurance cost can vary depending on your age and policy type. However, permanent life insurance policies are more expensive than term insurance plans because a portion of your premium goes towards your savings. 

Here are sample rates of term, whole life, and universal life insurance plans. 

Cost of Permanent Life Insurance for Women 

Age at purchase	20-year term life	Whole life	Universal life
30	$193	$3,195	$2,014
40	$291	$4,825	$2,840
50	$654	$7,522	$4,260
60	$1,673	$11,940	$7,143

Cost of Permanent Life Insurance for Men

Age at purchase	20-year term life	Whole life	Universal life
30	$226	$3,600	$2,345
40	$341	$5,412	$3,263
50	$835	$8,432	$4,925
60	$2,366	$13,613	$8,225

Cash Value of Permanent Life Insurance

The cash value of life insurance is an added incentive on top of the death benefit.  

Every time you make a premium payment, your amount is broken down into three categories:

Cost of Insurance  The amount of money required to fund a death benefit  Cost of Overheads The operating costs and expenses incurred by the insurance company  Cash Value  The account within your policy that accumulates value over time

A life insurance cash value is separate from its death benefit. This means that your loved ones will only receive the death benefit when you pass away, and the insurance company will keep the cash value. 

In most cases, people take loans against their cash value because it can serve as collateral. In addition, they can surrender their insurance policy when they require money. If you decide to surrender your permanent life insurance policy, your insurance company will deduct its fee and transfer the remaining amount to you. If you adhere to certain premium limits, your cash value might be tax-free.

The cash value terms might seem unjust when considering it’s your money, and the insurance company will keep it. But if you consider this financially, you can recover cash value money when you surrender your policy. 

Even though the cash value amount is tax-deferred, it will take several years for the compound interest to grow meaningfully. Moreover, for the first few years, the cost of insurance and fees eat up most of your premium, so the cash value grows at an even slower rate. Therefore, we don’t recommend any policy with cash value if you’re older. Your premium cost is likely to outweigh any eventual benefits.

Those planning to buy permanent life insurance and cash out through a cash value account would have to wait 20 to 30 years to do that. 

If you need permanent life insurance to cover estate expenses or leave an inheritance for your children, you should consider a universal life insurance policy because it has very few elements of cash value. 

Types of Cash Value Life Insurance Policy

Cash value life insurance policies are typically permanent, and this means your insurance is valid until you die, cancel it, or stop making payments. Below are some of the most common types of cash value life insurance. 

Policy	Cash Value Growth
Whole Life Insurance	The cash value increases at a fixed rate pre-determined by the insurance company. The objective of whole life insurance is to increase your cash value up to the death benefit amount when the policy matures, which happens around the time you reach 100.
Universal Life Insurance	The cash value depends on the market interest rates and the performance of the insurer.
Indexed Universal Life Insurance	The cash value depends on the index performance, such as the S&P 500.
Variable Life Insurance	The cash value can be invested in mutual funds or certain aggregated portfolios suggested by the insurer. However, if your investment options perform poorly, you might end up losing money, including your initial investment.

Term life insurance has no cash surrender value, so you will lose all your money if you cancel your policy. Therefore, term policies are cheaper. 

The only time you can get your money back is by paying the return of the premium rider. Even though this rider adds to your insurance cost, it ensures you receive a portion of the premiums paid if you survive your term policy. 

How to Access the Cash Value in Your Permanent Life Insurance Policy

Despite several legal barriers and contractual terms, there are a few legitimate ways to access permanent life insurance policy cash value. 

Since insurance premiums are costly, you need to learn how to make the best use of permanent life insurance cash value. Whether you want to get rid of your permanent life insurance policy, cash out, or take a loan, there are a variety of ways you can take advantage of your policy’s cash value. 

Even if you don’t want insurance coverage anymore, don’t let your policy lapse. If that happens, you won’t be eligible to receive the death benefit or cash value. 

Pay Your Premiums With Cash Value 

Variable and universal life insurance policies are favored because they allow you to pay premiums through your cash value. However, you can’t start paying your premium through cash value immediately after purchasing the policy because you need to accumulate enough cash to support your premium payments.

For instance, your premium payments are $5,000 per year, and you have $100,000 in cash value. So you’d need the policy’s cash value to return 2.5% interest yearly to cut your premiums in half while keeping the full cash value.

When you are planning to pay a certain amount for the rest of your life, you need a long-term plan to manage your premium payments, and paying via cash value is the best way.   

Cash as Collateral to Borrow From Insurer

A life insurance policy loan is one of the reasons people purchase a permanent life insurance policy. Since life insurance loans aren’t reflected on your credit score, you can conveniently make large purchases. Some people use this money to invest in real estate, while others pay for house expenses, medical bills, or buy cars. 

If you pass away while the loan is outstanding, the loan value will be deducted from your death benefit. 

In addition, borrowing against your policy’s cash value is quite straightforward and comes with low yearly interest rates. 

Sell Your Life Insurance Policy for a Settlement

Instead of surrendering your life insurance policy, you should consider selling it. Most companies buy an insurance policy for a value greater than the cash value but less than the death benefit. You can then use the money to make substantial investments or buy new properties. 

Remember, any broker that pairs you with a buyer will take a cut from the money you receive. However, it’s still a better option because you will get more money than you would by surrendering your policy. 

Ending Note 

A permanent life insurance policy can provide your family with a financial safety net. It can help pay for medical costs, finance a car, or cover any other expenses.

In addition, you can take out a loan from the insurer without affecting your credit score and extend the payment period for as long as you like. If you don’t pay the loan back, the amount will be deducted from your death benefit. 

Regardless of all the controversy surrounding permanent life insurance, it provides security for the rest of your life and allows you to access funds for major life events. 

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