What is Permanent Life Insurance
Permanent life insurance is an umbrella term for life insurance plans that do not expire, unlike term life insurance, which promises payment of a specified death benefit within a specific period of years.
Typically, permanent life insurance combines a death benefit with a savings portion, allowing policies to build a cash value, against which the policy owner can borrow funds or, in some instances, withdraw cash to help meet needs such as paying for a child's college education or covering medical expenses.
The two primary types of permanent life insurance are whole and universal life insurance policies. 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.
BREAKING DOWN Permanent Life Insurance
With permanent life insurance, there is often a waiting period after the purchase of policy, allowing for sufficient cash value to accumulate, before borrowing against the savings portion of the policy is allowed.
Further, 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 policies enjoy favorable tax treatment. The growth of cash value is generally on a tax-deferred basis, meaning that the policyholder pay no taxes on any earnings as long as the policy remains active.
As long as certain premium limits are adhered to, money can 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 amount of premiums paid can be taken without being taxed.
Permanent Life Insurance in Addition to Term
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 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. That 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 set aside savings to cover eventual estate tax bills.