Buying life insurance shouldn’t feel like a gamble. Rather than buying a term policy that expires after 10 or 20 years – meaning you’d need to find a new plan – you can purchase a permanent life insurance policy once and receive guaranteed coverage for the rest of your life. In addition to providing a lifetime of coverage, permanent life insurance policies have some advantages over other types of insurance products.
In this post, we’ll explain permanent life insurance and how it works. We’ll also explore the various types of permanent life insurance policies and their benefits, which will hopefully help you find the type of permanent life insurance that’s best for you and your family.
What is permanent life insurance?
“Permanent life insurance” is the term used to describe any form of life insurance in which the policy does not expire. Unlike a term life insurance policy that expires after a pre-set number of years (typically 5 to 30-year terms), a permanent life insurance policy is, well, permanent. This means the coverage spans the policyholder’s natural life, so long as the premiums are always paid and up-to-date.
How does permanent life insurance work?
One of the most unique benefits of permanent life insurance is that it has both a death benefit and cash value component.
- Death benefit – The lump sum amount that is paid out to your beneficiaries when you die
- Cash value – A separate savings account within the policy that grows tax-free over the life of the policy
With permanent life insurance, a portion of each payment you make goes toward the policy’s cash value. Some cash value components gain interest while others are invested (depending on the type of policy you purchase). Either way, the idea is that the cash value of your policy will grow over time.
Eventually, the policy’s cash value can be used for other financial needs. For instance, the policyholder could make a withdrawal or borrow against the policy’s cash value for things like:
- Paying off your mortgage
- Sending your children to college
- Covering your living expenses during retirement
The cash value can also be used to pay for your life insurance premiums. Many older Americans who have paid into their permanent life insurance policy for decades no longer need to make premium payments, as funds from the policy’s cash value cover the premiums instead.
How much does permanent life insurance cost?
As you might guess, permanent life insurance costs can vary widely depending on the type of policy. As with other forms of insurance, permanent life premiums also vary based on the applicant’s gender, age, health status, occupation, and other factors.
To give you an idea of what to expect cost-wise, the following are the annual price ranges for a 30-year-old non-smoker in good health:
- Whole life: $3,200 – $3,600
- Universal life: $2,000 – $2,400
If that same person waited until they were 50 years old to get covered, then the cost of permanent life insurance increases significantly.
- Whole life: $7,500 – $8,500
- Universal life: $4,200 – $5,000
How do permanent life insurance payouts work?
When a policyholder passes away, their beneficiaries will receive the death benefit outlined in the policy (minus any money that was borrowed as a loan). It’s important to note that the IRS does not consider this payout to be taxable income. Beneficiaries, however, will not receive any of the policy’s remaining cash value, as it is absorbed by the insurer.
Types of Permanent Life Insurance
The industry offers several different types of permanent life insurance; some even with their own sub-variants. Below are a few of the most popular permanent life insurance options.
Whole Life Insurance
Whole life insurance is the most basic form of permanent life insurance. Sometimes referred to as traditional life insurance, whole life guarantees the policy owner coverage for their “whole life,” as long as their premiums are paid.
The cash value component of a whole life policy earns a fixed interest rate (like money in a savings account at the bank). This means the cash value will grow slowly, but growth is guaranteed. And because the premiums and death benefits never change, whole life is one of the most expensive types of permanent life insurance.
Final Expense Insurance
Final expense insurance is a type of policy where the death benefit is just enough to cover the costs of a funeral, burial, and other end-of-life expenses. It’s considered a form of permanent life insurance because the coverage lasts the rest of your natural life.
This type of policy is designed for older adults who may have challenges qualifying for other types of insurance. Since the death benefit is relatively small, it is more affordable than other permanent life insurance options.
Guaranteed Issue Insurance
Guaranteed issue insurance is a type of whole life policy where the purchaser cannot be denied coverage. This type of policy is useful to someone who is in poor health and may have challenges qualifying for other types of insurance. While guaranteed issue has high premiums and lower payouts, the death benefits can be used to cover the cost of a funeral as well as any medical bills or other expenses.
Universal Life Insurance
Universal life insurance is similar to whole life but it allows for the flexibility to raise and lower the premiums and the death benefit within certain limits. This factor helps make universal life more affordable than whole life.
Similar to a whole life policy, the policy’s cash value grows at a fixed interest rate. If you want the opportunity to grow the cash value of your policy more quickly (but at higher risk), there are two other types of universal life insurance to consider: variable and indexed universal life insurance.
Variable Universal Life
Variable universal life insurance is a type of universal life insurance where the policy’s cash value can be invested across a small selection of mutual funds (like a 401k retirement plan). This investment opportunity means that the cash value of the policy has greater growth potential and can possibly help offset the cost of premiums. However, your policy’s cash value is also susceptible to market risks – and your policy premiums can even increase if the policy’s cash value dips too low.
Indexed Universal Life
Indexed universal life insurance is another type of universal life insurance where the cash value component is invested in a common stock market index such as the S&P 500. Since the policy’s cash value is invested in an index fund, these policies are considered less risky than a traditional variable universal life policy.
Fixed Indexed Universal Life
Fixed index universal life insurance is a type of indexed universal life policy where the performance of the cash value investment has a floor and ceiling set by the insurer. This helps reduce investment risk and the possibility of the policy falling into a negative balance. These guardrails can be favorable to policyholders who are looking for guaranteed growth without the fear of a market downturn. It’s important to note, however, that any gains made above the set earnings cap will go to the insurer.
Who should consider permanent life insurance?
Permanent life insurance can be useful beyond its death benefit. For that reason, there’s a wide array of people who should consider a permanent life policy.
A permanent life insurance policy may be right for someone who:
- Wants coverage for the rest of their life
- Would like their policy to grow in value so that it can be borrowed against or possibly even pay for the premiums
- Seeks retirement income without fear of a market downturn
- Needs lifelong coverage without a medical exam
If you’d like to find out which type of permanent life insurance is right for you, the professional insurance advisors at Principled Life can help. We make buying life insurance simple and convenient, and we’re positive there’s a plan for every budget and every condition. Give us a call and we’ll get you covered today.
