What Is A Permanent Life Insurance Policy? Permanent Life insurance is not one kind of life insurance, it is any kind of life insurance that is meant to provide coverage for someone’s entire life. This is in contrast to term life, which is only meant to provide protection for a specific length of time such as 10 years or 20 years.
All permanent life insurance has a cash value component, but the growth of cash value occurs in different ways depending on the policy type. Different types of permanent life insurance are very different in terms of policy features, and potential long term cost. It is very important that you fully understand the similarities and differences before you make any purchasing decision.
What Is A Permanent Life Insurance Policy? (Explained)
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.
- 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.
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 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 the purchase of 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 amount of 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 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 because policy loans usually are not considered taxable income. Generally, withdrawals up to the sum total of premiums paid can be taken without being taxed.
Types of Permanent Life Insurance
1: Whole or ordinary life
This is the most common type of permanent insurance policy. It offers a death benefit along with a savings account. If you pick this type of life insurance policy, you are agreeing to pay a certain amount in premiums on a regular basis for a specific death benefit. The savings element would grow based on dividends the company pays to you.
2: Universal or adjustable life
This type of policy offers you more flexibility than whole life insurance. You may be able to increase the death benefit, if you pass a medical examination. The savings vehicle (called a cash value account) generally earns a money market rate of interest. After money has accumulated in your account, you will also have the option of altering your premium payments – providing there is enough money in your account to cover the costs. This can be a useful feature if your economic situation has suddenly changed. However, you would need to keep in mind that if you stop or reduce your premiums and the saving accumulation gets used up, the policy might lapse and your life insurance coverage will end. You should check with your agent before deciding not to make premium payments for extended periods because you might not have enough cash value to pay the monthly charges to prevent a policy lapse.
3: Variable life
Variable life is policy combines death protection with a savings account that you can invest in stocks, bonds and money market mutual funds. The value of your policy may grow more quickly, but you also have more risk. If your investments do not perform well, your cash value and death benefit may decrease. Some policies, however, guarantee that your death benefit will not fall below a minimum level.
4: Variable-universal life
If you purchase this type of policy, you get the features of variable and universal life policies. You have the investment risks and rewards characteristic of variable life insurance, coupled with the ability to adjust your premiums and death benefit that is characteristic of universal life insurance.
What’s the difference between term and permanent life insurance?
Term life and permanent life are the two main types of life insurance policies. While permanent insurance lasts your entire life, term insurance lasts for a set time period that you choose when you buy a policy — say 10, 20 or 30 years.
Features Of Permanent Life Policies
An essential feature of most permanent life policies is a savings portion known as cash value. Cash value accumulates over time as you make regular payments toward your policy (these payments are known as premiums). You can typically borrow against your policy’s cash value, which accumulates on a tax-deferred basis.
The cash value is different from the policy’s death benefit. While the cash value is a savings that accumulates over time, the death benefit is the amount of money that your designated beneficiary will receive upon your death. If you cancel your life insurance policy, you will get the accrued cash value. However, you could be assessed a surrender charge for cancellation early in your policy, so be sure to check with your agent first.