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There's a lot to think about when you're considering life insurance, starting with what kind of policy to get. One term you may hear while shopping for coverage is "permanent life insurance." Permanent life insurance lasts your whole life as long as you keep paying your premiums, unlike term life insurance, which ends when the policy term is up. Permanent life insurance pays a death benefit to your beneficiaries. It also builds cash value you can use during your lifetime.
What Is Permanent Life Insurance?
Permanent life insurance, also called whole life insurance, lasts as long as you live (or up to age 99, depending on the policy). If your premiums are current when you die, your beneficiaries receive a payout called the death benefit. In addition, permanent life insurance accumulates cash value that earns interest over time. You can tap into the policy's cash value during your lifetime to cover financial needs or pay premiums.
How Permanent Life Insurance Works
When you pay your permanent life insurance premiums, the insurance company puts part of your payment in a cash value account. Money in this account earns interest at a guaranteed rate, typically 1% to 2% annually. Once the policy's cash value reaches a certain level, there are several ways you can use it during your lifetime:
- Use the cash value to pay your premiums
- Borrow from the cash value account
- Withdraw money from the account
- Cancel (surrender) the policy and take the cash value, minus surrender fees
Depending on the type of permanent life insurance you purchase (more on that below), you may have other options for using the cash value.
Any cash value unused at your death goes to the insurance company, not to your beneficiaries. If you don't want that to happen, you can typically trade the cash value of permanent life insurance for an equivalent increase in the death benefit.
Learn more >> What Happens to Cash Value in a Life Insurance Policy at Death?
Types of Permanent Life Insurance
There are several kinds of permanent life insurance to consider.
Whole Life Insurance
Whole life insurance is the simplest type of permanent life insurance. Death benefits and premiums usually stay the same throughout your lifetime.
A whole life policy's cash value grows tax-deferred at a guaranteed interest rate; some whole life policies also pay dividends. When the policy's cash value reaches a certain point, you can borrow from it, withdraw part of it or use it to cover your premiums. Unless you replenish the funds, however, borrowing or withdrawing from the cash account reduces your policy's death benefit.
Universal Life Insurance
Sometimes called adjustable life insurance, universal life insurance also builds cash value you can use during your lifetime. Unlike traditional whole life insurance, the cash account of a universal life insurance policy typically earns a money market interest rate, which isn't guaranteed. Earnings may rise or fall, and premiums may increase, which could cause your policy to lapse if you can't afford higher payments.
When enough money accumulates in your universal life policy's cash account, you may be able to change your premiums or your death benefit. For example, you could temporarily lower your premiums after losing your job. Increasing your death benefit usually requires a medical exam.
Variable Life Insurance
Variable life insurance builds cash value you can use during your lifetime. It differs from universal and whole life in offering choices for how to invest your cash value. You can typically choose among stocks, bonds and mutual funds. This could build your cash value faster, but could also cost you money if the investments don't perform well. Some variable life insurance policies let you put part of your premiums in a separate cash account earning a fixed interest rate.
Variable life insurance policies generally charge significant fees, which can further erode your cash value. If the value of your cash account drops below a certain level, your policy may lapse.
Variable Universal Life Insurance
Variable universal life insurance combines the investment options of variable life with the adjustability of universal life. As with variable life, you can select different investment options for your cash value account, giving you the potential to earn more or lose money. As your policy's cash value grows, you may have the option to adjust your premiums and death benefit, as with universal life insurance.
Permanent Life Insurance vs. Term Life Insurance
Term life insurance and permanent life insurance are the two main types of life insurance. Both provide a death benefit if you die with your policy in force. However, there are some important differences between the two.
Permanent life insurance is intended to last as long as you live. On the other hand, term life insurance lasts for a specific period, typically one to 30 years. Death benefits and premiums for term life insurance generally stay the same throughout the term. When the term ends, your coverage ends, too—the policy has no cash value.
Tip: Your insurer may provide the option to convert a term life insurance policy into a permanent policy before your term is up.
You may be able to renew your term life insurance or may need to purchase a new policy. Either way, your premiums will typically increase because you're older than when you bought the original policy.
Regardless of your age, term life insurance generally costs much less than permanent life insurance. A healthy nonsmoker can expect to pay an average of $38.49 per month for a 30-year term life policy with $500,000 in coverage, according to data from Policygenius.
The low cost makes term life insurance an affordable way to protect your family. For example, you might purchase a 30-year term life insurance policy to ensure your spouse can pay off the mortgage if you die, then cancel the policy once the mortgage is paid off.
| Term vs. Permanent Life Insurance | ||
|---|---|---|
| Term Life | Permanent Life | |
| Duration | Typically one to 30 years | Lifetime |
| Cost | Lower | Higher |
| Cash value | No | Yes |
How Much Does Permanent Life Insurance Cost?
The cost of permanent life insurance depends on a variety of factors, including your age, gender and health; how much coverage you purchase; and the type of policy you buy. Women, nonsmokers, younger people and those in good health generally pay less for life insurance than men, smokers, older people or those in poor health.
Permanent life insurance policies offering more flexibility and higher returns typically cost more than traditional whole life insurance. Some permanent life insurance policies also offer optional features such as long-term care insurance or a rider to cover premiums if you become disabled; expect to pay more for these add-ons.
Below are average monthly premiums for whole life insurance, the most common kind of permanent life insurance, for healthy nonsmokers based on age, gender and coverage amounts.
| Average Monthly Cost of Whole Life Insurance | ||||
|---|---|---|---|---|
| Age | Gender | $250,000 Coverage | $500,000 Coverage | $1 Million Coverage |
| 20 | Female | $146 | $287 | $545 |
| Male | $169 | $334 | $639 | |
| 30 | Female | $206 | $408 | $801 |
| Male | $238 | $472 | $920 | |
| 40 | Female | $296 | $588 | $1,161 |
| Male | $355 | $706 | $1,372 | |
| 50 | Female | $462 | $920 | $1,826 |
| Male | $543 | $1,081 | $2,117 | |
| 60 | Female | $772 | $1,540 | $3,065 |
| Male | $903 | $1,802 | $3,556 |
Source: PolicyGenius
Pros and Cons of Permanent Life Insurance
Before purchasing permanent life insurance, carefully evaluate its benefits and drawbacks.
Pros
- Lifetime coverage: Protection lasts your whole life, regardless of your age or health.
- Cash value: You can use the cash value of permanent life insurance to pay premiums or meet other financial needs, such as paying for a child's wedding or college tuition.
- Potential for greater returns: If your permanent life insurance offers investment options, dividends or a money market rate of interest, your cash account could grow faster.
- May offer flexible premiums and death benefit: You may be able to adjust the premiums and death benefit of some permanent life insurance policies as your cash account grows.
Cons
- Expensive: Permanent life insurance can cost 15 times more than term life insurance, which may put it out of reach for your budget.
- Complicated: Permanent life insurance is usually more complex than term life coverage. Be sure you understand all the terms and fees associated with a policy before buying.
- Risk of loss: Choosing your own cash value investments, as some permanent life insurance policies allow, could cost you money if your investments perform poorly.
- Possible policy lapse: Tapping your cash value or making poor investment choices for your cash account could cause your savings to dwindle. If the cash value drops too low, your policy may lapse.
- Potential tax liability: You may owe taxes on any loans that remain unpaid when your policy lapses or is surrendered.
Is Permanent Life Insurance Worth It?
Permanent life insurance may make sense for you if:
- You have maxed out your retirement accounts. If you're already contributing the maximum to savings plans such as your 401(k), health savings account (HSA) and individual retirement account (IRA), permanent life insurance can generate additional income for retirement.
- You're seeking a low-risk investment. Whole life insurance offers guaranteed returns and tax-deferred growth—an appealing option if you're risk averse. However, there are other low-risk ways to diversify your investments that could offer higher returns.
- You want to leave an inheritance. Permanent life insurance can ensure your loved ones receive a death benefit no matter how long you live. Although there are some exceptions, life insurance payouts generally aren't taxable, which can mean more money in your beneficiaries' pockets.
- You have dependents with special needs. Do you have a child or other loved one who requires lifelong care? Permanent life insurance can give you peace of mind that they're provided for.
- You can afford it. Due to its cost, permanent life insurance is typically used in estate planning for high-net-worth individuals. If you'd struggle to afford permanent life insurance premiums, term life insurance may be a better choice.
- You're comfortable managing investments. Permanent life insurance that offers investment options, such as variable life insurance, can be complex to manage. Poor investment decisions could cost you money or even end your coverage if your account runs out of money. You'll need to stay on top of cash value account balances, fees and earnings to make the most of your policy.
Learn more >> Which Is Better: Term or Whole Life Insurance?
Frequently Asked Questions
Yes, you can take a cash withdrawal from your permanent life insurance policy.
Once the cash value of your permanent life insurance reaches a certain amount, you can withdraw or borrow part of the cash value account or use the account to pay your premiums. Loans and withdrawals reduce your policy's death benefit; withdrawing all the cash value cancels your policy.
If you don't need the policy anymore, you can surrender it and receive the cash value, minus any unpaid loans, outstanding premiums and surrender fees. There may be taxes on this money.
Yes, permanent life insurance has a death benefit, or a sum of money paid to your beneficiaries when you die, as long as your policy is active. If you don't pay your premiums, your policy could lapse and your beneficiaries won't receive a death benefit. Some permanent life insurance policies let you use the cash value to increase the death benefit.
Life insurance generally costs less when you're young and healthy and costs more as you age. Because premiums for most types of life insurance stay level throughout the term, purchasing life insurance in your 20s or 30s can lock in coverage at an affordable price. Many people buy life insurance to financially support a spouse or children, but life insurance can also help pay funeral costs or outstanding debts after your death.
The Bottom Line
Permanent life insurance can be complex. Consider consulting a financial advisor to determine if this kind of coverage makes sense for you. An insurance broker can help assess your life insurance needs and find the right policy, whether permanent or term coverage.
No matter what type of life insurance you're in the market for, having good credit could make it more affordable. Many insurance companies check credit-based insurance scores when evaluating your application. These scores differ from the consumer credit scores lenders use, but are based on many of the same factors. Check your FICO® Score☉ for free before shopping for life insurance. If your score isn't where you'd like it to be, taking steps to improve your credit score could mean lower life insurance premiums.