Permanent Life Insurance: What Is It & How Does It Work?

Permanent Life Insurance
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Permanent life insurance provides coverage for the full lifetime of the insured person. While it is more expensive than term insurance, permanent policies combine a death benefit with a savings component that earns interest on a tax-deferred basis.

The two primary types of permanent life insurance are whole life and universal life. The cash value of whole life insurance grows at a guaranteed rate.

Universal life insurance also contains savings and a death benefit, but it features more flexible premium options and its earnings are based on market interest rates. Variable life and variable universal life also provide expanded options to invest the cash value in mutual funds and other financial instruments.

What is life insurance?

Life insurance is a contract between you and an insurance company. In exchange for your premium payments, the life insurance company will pay a lump sum known as a death benefit to your beneficiaries after your death, as long as your policy is in force. If you have permanent life insurance, there may be a cash value component, too.

Financial protection and peace of mind are at the forefront of life insurance. The best life insurance companies offer coverage options that help you ensure your loved ones will be financially taken care of if you die. Knowing your family will not face financial hardship when you’re gone provides peace of mind.

Life insurance beneficiaries can use the money paid out by a policy for whatever purpose they choose. Often this includes:

  • Paying for living expenses that were previously covered by the insured person’s income.
  • Paying off credit card bills, medical bills, mortgages or car loan balances.
  • Paying for funeral and final expense costs.
  • Funding children’s college tuition and expenses.

Having the safety net of life insurance can ensure that your family can stay in their home and pay for their wants and needs.

In addition, many life insurance policies include living benefits. This feature allows you to take money from your own death benefit while you’re still living, but only in specific cases outlined in the policy. These can include cases where:

  • You’re diagnosed with a terminal illness.
  • You develop a chronic or critical illness.

You can use money from living benefits to pay for anything you like, such as medical bills not covered by health insurance or mortgage payments. When comparing life insurance vs. health insurance there are no similarities, but living benefits can pay health care costs.

How does life insurance work?

Life insurance works by providing your beneficiaries with a death benefit payout if you die, but only if your policy is in force when you pass away—meaning you have paid the required premiums while you’re alive. The death benefit can be used for any purpose your beneficiaries choose.

Before you enter into a life insurance contract, the life insurance company will determine your required premiums. There are several factors that affect life insurance quotes, including:

  • Age
  • Gender
  • Health and medical history
  • Coverage amount you choose
  • Type of life insurance (such as term life vs. whole life)

The younger and healthier you are, the better your quotes will be. Comparing life insurance quotes with several reputable companies is a great way to start finding the best coverage for a good price.

There are two primary types of life insurance: term and permanent life:

  • Permanent life insurance — such as whole life insurance or universal life insurance — can provide lifetime coverage. Most types of permanent life insurance include the ability to accumulate cash value which can be accessed while you’re still living.
  • Term life insurance provides protection for a certain period. Term life is usually the cheapest life insurance option and it has no cash value.

Types of permanent life insurance

If you’re shopping for life insurance and decide to buy a permanent life policy, there are many types to choose from. Your decision will depend on how much risk you’re comfortable with and how much flexibility you want.

Whole life insurance

Whole life insurance policies have fixed premiums and a cash value component that (slowly) accumulates.

Insurers may offer different payment schedules, such as paying premiums up to age 100, paying premiums for a fixed number of years (such as 10, 15 or 20 years while maintaining coverage after payments stop), and single-payment policies. When you die, your beneficiaries typically receive the face amount of the policy, not the face amount plus cash value.

You can withdraw money or borrow against the cash value during your lifetime — just know that if you don’t pay it back, the insurer will reduce the death benefit by the same dollar amount.

Universal life insurance

The main draw of universal life insurance is that it allows you to adjust your premiums and death benefit, giving you flexibility as your financial circumstances change. You can also combine the cash value with the death benefit to increase the payout to your beneficiaries. 

Indexed universal life insurance is a specific type of universal life insurance that’s tied to a stock or bond index, like the S&P 500. It offers similar flexibility in premiums and death benefits as universal life, though the premiums will be more expensive if you choose this option.

Variable life insurance

Variable life insurance offers policyholders the opportunity to put their cash value in investments of their choosing, which can make this type of coverage riskier than whole or universal life. You may have the option — similar to universal life — to include the cash value in the death benefit.

Premiums are typically fixed, and returns on the cash value are not guaranteed.

Variable universal life insurance

What do you get when you mash together variable life and universal life? You get variable universal life, or VUL, a type of life insurance with a lot of moving parts. The policy’s underlying cash value is subject to the ups and downs of the investments you choose. You can adjust your premium payments and death benefit.

However, this increased flexibility comes with risks. If your investment choices don’t pan out the way you’d hoped, you could end up owing money or even losing the coverage.

Other permanent policies

There are more specific types of permanent life such as survivorship policies, which are a form of family life insurance. These policies insure two lives at once — typically spouses — and pay out when the second person dies.

If you’re looking at permanent life insurance for retirement or investment goals, discuss it along with other options with a fee-based life insurance advisor before making a decision.

Permanent life insurance cost

The cost of permanent life insurance can vary significantly among policy types. Here are sample rates for whole life and universal life policies, compared with term life. As you can see, permanent life insurance premiums are often significantly higher.

Average annual rates for women

Age at purchase20-year term lifeWhole lifeUniversal life
Source: Quotacy. Lowest three rates for each age and policy type averaged. Based on $500,000 of coverage for applicants in excellent health. Rates valid as of Jan. 7, 2023.

Average annual rates for men

Age at purchase20-year term lifeWhole lifeUniversal life
Source: Quotacy. Lowest three rates for each age and policy type averaged. Based on $500,000 of coverage for applicants in excellent health. Rates valid as of Jan. 7, 2023.

Permanent life insurance pros and cons

Advantages of permanent life insurance

  • Coverage typically lasts your entire life.
  • You can tap into the policy’s cash value while you’re still alive.
  • Depending on the policy you choose, you might be able to combine the cash value growth with the death benefit, increasing the payout when you die.

Disadvantages of permanent life insurance

  • Permanent policies cost significantly more than term life policies.
  • Universal and variable policies require careful monitoring to ensure the cash value performs well and the policy stays in force, making them riskier than term-life policies.
  • If you borrow from the cash value and don’t pay it back, the insurer typically reduces the death benefit by the same amount.

Permanent life vs. term life insurance

There are two main differences between term life and permanent life insurance: Permanent life insurance generally lasts the rest of your life and it has a cash value component. Term life insurance doesn’t. Instead, term life insurance works this way:

  • Term life insurance has a set period of level premiums during which your rate is locked in, such as 10, 15, 20, 25 or 30 years.
  • After the level term period, you can renew the policy yearly but at a much higher price.
  • You may be able to convert a term life policy to permanent life insurance.

Term life insurance is a good choice for many families. Life insurance needs are often finite, allowing you to match the length of the term to your need for life insurance protection. For instance, someone age 35 might decide to buy enough coverage to replace their income for 30 years.

Term life insurance is the most affordable type of life insurance, so you can get the most bang for your buck.

If you discover you need permanent coverage later, many term life policies have a term life conversion option to convert the policy to a permanent one. The life insurer will tell you the policy choices when you convert. Your rate will be based on the age at which you convert and your original health class. You won’t need a new life insurance medical exam to do a term life conversion.

As you weigh out your options, remember there is no one-size-fits-all solution. A financial advisor can help you figure out where life insurance fits into your overall financial plan.

Permanent life vs. term life insurance

AttributesPermanent life insuranceTerm life insurance
CostMore expensiveLess expensive
Policy lengthUsually for lifeSpecific number of years, such as 20 or 30 years, but often possible to renew
Cash valueUsually, yesNo
Guaranteed death benefitNot alwaysYes

Do I need permanent life insurance?

Permanent life insurance is good for people who want to build cash value. It’s also better than term life insurance for people who want to make sure there is a death benefit payout for their loved ones no matter when they die.

Typical goals that lead people to permanent life insurance include:

  • Need for lifelong life insurance protection because people are financially dependent on you.
  • Want to fund a life insurance trust.
  • Desire to leave a financial legacy to heirs.
  • Desire to capitalize on the cash value or investment component of a permanent policy.
  • Want to make sure your loved ones get money to pay final expenses and funeral costs.

If you want the most affordable life insurance coverage, term life insurance is your best bet. Term life may also be better if your main objective is to pay off your mortgage or replace your income during peak earning years.

However, term life insurance is not a good choice for funding a trust or other goals that require a payout no matter how long you live.

Is permanent life insurance worth it?

Longevity, cost and flexibility are just a few of the factors to consider when shopping for permanent life insurance. Permanent policies may be worth it for people who:

  • Need coverage no matter when they die.
  • Want to use life insurance to leave an inheritance.
  • Want a life insurance policy to cover final expenses.

Permanent life insurance is typically more expensive than term life insurance because of the lifelong coverage and investment opportunities. And remember, certain policies require detailed investment attention, something you may not have the time or inclination to give.


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