What Is Permanent Life Insurance and Who Should Buy It?

Permanent life insurance is a financial product that provides lifelong coverage and builds cash value over time. Unlike term life insurance, which expires after a set period, this type of policy remains active as long as premiums are paid. The types of permanent life insurance mainly include whole life and universal life, each offering its own features and benefits.

Despite the benefits of permanent life insurance, it may not be ideal for everyone. It's particularly beneficial for those with higher incomes, specific lifetime needs and an interest in accumulating cash value alongside insurance coverage.

• How Permanent Life Insurance Works
• Cost of Permanent Life Insurance
• Types of Permanent Life Insurance
• Term vs. Permanent Life Insurance
• Pros and Cons of Permanent Life Insurance
• Who Should Purchase Permanent Life Insurance
• How to Get Permanent Life Insurance
• FAQ About Permanent Life Insurance Policies

Permanent life insurance refers to a life insurance policy that doesn’t expire — coverage lasts the policyholder's entire lifetime. It has a cash value that the policyholder can borrow against or withdraw. However, the cost of permanent life insurance is typically higher due to these extended benefits.

A permanent life policy may be a good option, depending on your needs and circumstances. Understanding the various qualities of permanent life insurance will help you determine whether this type of policy suits you.

Permanent life insurance's investment potential makes these policies a valuable tool for long-term financial planning, not just a means of protection. Understanding how the cash value grows and can be utilized is vital in maximizing the benefits of a permanent life insurance policy.

The cost of permanent life insurance is not a one-size-fits-all figure; it varies based on individual needs and circumstances. Several factors come into play when determining the premiums for this type of policy, and understanding them can help you make an informed decision that aligns with your financial goals.

• Age: Generally, the younger you are when you purchase a policy, the lower the permanent life insurance cost will be.
• Health Status: Medical exams often influence rates. A healthy individual is likely to receive more favorable permanent life insurance premiums.
• Coverage Amount: The higher the death benefit you choose, the higher the permanent life insurance rate will be.
• Policy Type: Different types of permanent life insurance, such as whole or universal life, may have different cost structures.
• Additional Riders: Adding optional features or riders to your policy can also affect permanent life insurance policy costs.
• Payment Frequency: Whether you choose to pay your premiums monthly, quarterly or annually can influence the overall permanent life insurance cost.
• Investment Performance: For policies with a cash value component tied to investments, the performance of those investments can impact the cost.

Understanding the tax implications of permanent life insurance can help you make the most of its financial benefits. Here's a breakdown of the key tax aspects:

• Tax-Free Death Benefit: One of the standout features of permanent life insurance is the tax-free death benefit. When the policyholder passes away, beneficiaries receive this payout without any federal income tax deductions, ensuring that your loved ones get the full financial support intended.
• Tax-Deferred Cash Value Growth: The cash value component of your policy grows on a tax-deferred basis. This means that you won't owe any taxes on the gains as long as they remain within the policy. This tax-deferred growth can significantly boost the cash value over time.
• Taxable Withdrawals: If you decide to withdraw from the cash value, the amount exceeding your total premiums paid into the policy is subject to income tax. It's important to keep track of your basis (total premiums paid) to understand the tax implications of any withdrawals.
• Loans Against Cash Value: You can take out loans against your policy's cash value without incurring taxes. However, failure to repay the loan can reduce the death benefit and may result in tax liabilities if the policy lapses.
• Policy Surrender: If you choose to surrender the policy, the cash value minus the premiums you've paid is considered taxable income. This could push you into a higher tax bracket for the year.
• Gift and Estate Tax: In some cases, the death benefit may be subject to federal gift and estate taxes. Proper estate planning can often mitigate this.

For a comprehensive understanding of these tax implications, it's advisable to consult IRS Publication 525 or seek advice from a tax professional.

There are two main types of permanent life insurance: whole and universal. Each type has its own features, benefits and drawbacks. Universal life insurance often comes with lower premiums and greater flexibility, while whole life insurance offers more stability through guaranteed death benefits and fixed premiums. That said, both permanent life insurance types offer financial protection. The better option will depend on your specific needs and goals.

Whole life insurance combines life insurance coverage with a savings account, offering financial protection for your entire lifetime or up to a specified age, usually between 100 and 120 years. The policy remains active as long as you keep up with your premium payments.

Main Features:

• Death benefit is guaranteed and fixed
• Fixed premiums
• Guaranteed cash value
• May grow through dividends

Types of Whole Life Insurance:

• Simplified Issue Whole Life
• Guaranteed Acceptance Whole Life
• Non-Participating Whole Life
• Participating Whole Life
• Indeterminate Premium Whole Life
• Economatic Whole Life
• Limited Payment Whole Life
• Single Premium Whole Life

These policies offer a robust combination of guaranteed security and potential financial growth

Universal life insurance offers a more flexible approach to permanent life coverage. It allows you to adjust your premiums and death benefit based on your changing financial needs. The cash value component is often tied to market interest rates, providing the potential for higher returns. It's important to note that the growth of the cash value is not guaranteed. It can fluctuate based on the performance of the insurance company's investment portfolio.

A specialized type of permanent life insurance but death benefit changes with the market rate is also available under this category.

Main Features:

• Death benefit is not guaranteed
• Premiums can be adjusted (within limits)
• Cash value can fluctuate

Types of Universal Life Insurance:

• Traditional or Non-Guaranteed Universal Life
• No Lapse Guaranteed Universal Life
• Indexed Universal Life
• Variable Universal Life

These options are vital, especially when considering a permanent life insurance policy where the policyowner requires flexibility in financial planning.

Another distinct type of permanent life insurance is variable life insurance. Like other permanent life policies, it offers a death benefit and a cash value component. However, the cash value in variable life can fluctuate significantly based on the performance of investments chosen by the policyholder.

Unlike whole life insurance, which has a guaranteed cash value growth, and universal life, which offers adjustable premiums and benefits with more conservative investment options, variable life provides the opportunity for potentially higher returns through direct investment in the stock market and other securities. This added investment control and potential for higher returns come with an increased risk of volatility, making it suitable for those with a higher risk tolerance.

When selecting a life insurance policy, you have the choice between term and permanent life insurance. Both types offer financial protection but are tailored for different financial goals and life situations.

Similarities:

• Financial Protection: Both term and permanent life insurance aim to provide financial security to beneficiaries upon the insured's death.

• Death Benefit: Each type offers a death benefit, which can be used to settle debts, cover funeral expenses or provide ongoing financial support to loved ones.

Differences:

• Coverage Duration: Term life insurance provides coverage for a set period, such as 10 to 30 years, and may require renewal. Permanent life insurance offers coverage for a lifetime without the need for renewal.

• Premium Stability: Term life insurance premiums may increase upon renewal, while permanent life insurance premiums generally remain level for the life of the policy.

• Cash Value Component: Permanent life insurance comes with a cash value component that can be invested, withdrawn or borrowed against. Term life insurance lacks this feature.

• Financial Goals: Term life insurance is often chosen to cover specific financial responsibilities like a mortgage or children's education. Permanent life insurance is more aligned with long-term financial planning, including retirement savings.

Comparing permanent life insurance vs term life insurance is a critical consideration when determining the right type of policy that best fits your needs, circumstances and goals. The better option will depend on whether you seek immediate coverage or long-term financial security.

Understanding the pros and cons of permanent life insurance can help you determine whether it is the right choice for your financial planning needs.

Deciding on permanent life insurance requires consideration of various factors. Below are answers to some of the most commonly asked questions about permanent life insurance to help you make an informed decision.