What is Permanent Life Insurance?
Permanent life insurance is an umbrella term for life insurance policies that do not expire. Typically, permanent life insurance combines a death benefit with a savings portion.
The two primary types of permanent life insurance are whole life and universal life. Whole life insurance offers coverage for the full lifetime of the insured and its savings can grow at a guaranteed rate. Universal life insurance also offers a savings element in addition to a death benefit, but offers different types of premium structures and earns based on market performance.
How Permanent Life Insurance Works
Unlike term life insurance, which promises payment of a specified death benefit for a specific period of years, permanent life insurance lasts the lifetime of the insured (hence, the name), unless non-payment of premiums causes the policy to lapse.
Permanent life insurance premiums go both towards maintaining the policy's death benefit and allowing the policy to build cash value, against which the policy owner can borrow funds or, in some instances, withdraw cash outright to help meet needs such as paying for a child's college education or covering medical expenses.
There is often a waiting period after the purchase of a permanent life policy, allowing for sufficient cash value to accumulate, before borrowing against the savings portion is allowed. If the amount of the total unpaid interest on a loan, plus the outstanding loan balance, exceeds the amount of your policy's cash value, the insurance policy and all coverage will terminate.
- Permanent life insurance refers to coverage that never expires, unlike term life insurance, and combines a death benefit with a savings component.
- The two primary types of permanent life insurance are whole life and universal life.
- Permanent life insurance policies enjoy favorable tax treatment.
- Some term life policies offer the option to convert to permanent life.
Permanent Life Insurance and Taxes
Permanent life insurance policies enjoy favorable tax treatment. The growth of the cash value is generally on a tax-deferred basis, meaning that the policyholder pays no taxes on any earnings as long as the policy remains active.
As long as certain premium limits are adhered to, money can also be taken out of the policy without being subject to taxes, since policy loans generally are not considered taxable income. Generally, withdrawals up to the sum total of premiums paid can be taken without being taxed.
Converting Term Life to Permanent Life
Different people have different insurance needs at different periods of their lives. Term life insurance is popular for its lower premiums but usually will expire well before the end of a policyholder's life.
While the aim is to have paid off most debt and other financial obligations by that time—while also accruing sufficient savings to make a large amount of life insurance unnecessary—some people may find that they'd prefer ongoing coverage and savings opportunities, and so might want a new permanent policy.
For this reason, many term life policies offer the option to convert to permanent policies later, often without the need to take medical exams or otherwise re-qualify. Such a feature might make it appealing for someone with medical issues that could make a new policy prohibitively expensive, for instance, or with chronic conditions that require ongoing expenses that could be drawn from the savings portion.
While the premiums for permanent life insurance are much more expensive than those for term coverage, often those who would sign up for such policies have earned enough by that stage of life to afford them. With the added opportunity for savings, they can also use it as a tax-favorable investment vehicle to cover the needs of lifelong dependents, for example, or for estate-planning purposes.