Permanent Life Insurance: Definition, Types, Vs. Term

What Is Permanent Life Insurance?

Permanent life insurance is an umbrella term for life insurance policies that do not expire. The two primary types of permanent life insurance are whole life and universal life, and most permanent life insurance combines a death benefit with a savings portion. 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 it features different types of premium structures and earns based on market performance.

Once you've picked the policy that's right for you, remember to research the firms you're considering thoroughly to ensure you'll get the best life insurance available.

Understanding Permanent Life Insurance

Unlike term life insurance, which promises the 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 nonpayment of premiums causes the policy to lapse.

Permanent life insurance premiums go toward both maintaining the policy’s death benefit and allowing the policy to build cash value. The policy owner can borrow funds against that cash value or, in some instances, withdraw cash from it 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 purchasing a permanent life policy during which borrowing against the savings portion is not permitted. This allows sufficient cash to accumulate in the fund. If the total unpaid interest on a loan, plus the outstanding loan balance, exceeds the amount of a policy’s cash value, the insurance policy and all coverage will terminate.

Permanent life insurance policies enjoy favorable tax treatment. The cash value growth 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 taxes because policy loans are usually not considered taxable income. Generally, withdrawals up to the total of premiums paid can be taken without being taxed.

Permanent Life Insurance vs. Term Life Insurance

Different people have different insurance needs at different periods of their lives. Term life insurance is popular for its lower premiums, but it 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 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 qualify again. Such a feature might make the conversion appealing for someone with medical issues that could make a new policy prohibitively expensive or with chronic conditions requiring ongoing expenses drawn from the savings portion.

While the premiums for permanent life insurance are much more expensive than those for term coverage, 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 or for estate-planning purposes.

Advantages and Disadvantages of Permanent Life Insurance

There are pros and cons to purchasing permanent life insurance. If you can afford the higher premiums, permanent life insurance allows you to provide a death benefit to your beneficiaries without the constraints of term life insurance. A permanent life insurance policy allows you to invest in an account with a tax advantage, which you can borrow from, or use, during the lifetime of the policy, as well.

The downsides to purchasing a permanent life insurance policy are the high costs of premiums, the risk of not being able to afford to keep up with payments, and spending down the cash policy so much that it eats into the death benefit.