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What is permanent life insurance?
Permanent life insurance represents a category of several types of life insurance without a pre-set expiration date, including whole life insurance and universal life insurance. Whole life insurance offers coverage for your entire lifetime and its cash value can often grow at a guaranteed rate. Universal life also offers a cash value element in addition to a death benefit, but provides different types of premium structures and earnings based on market performance. The cash value earned comes directly from your paid premiums.
Permanent life insurance, as the name implies, is designed to last for your entire life. When you buy it, you’re permanently covered, regardless of how long you live and the coverage does not expire as long as premiums are paid. In fact, some permanent life insurance policies can be used as a tool to help with retirement planning. These products are called Life Insurance Retirement Plans (LIRPs) and can provide regular income after retirement.
Understanding the ins and outs of permanent life insurance can seem overwhelming, but SelectQuote can help you sort it out. We can instantly find and compare personalized quotes from some of the most trusted insurance companies, making sure the policy you choose is right for you.
The Basics of Permanent Life Insurance
As the name suggests, permanent life insurance is designed to last your entire life. The policy lasts as long as the premiums are paid. Permanent life insurance premiums go toward both maintaining the policy’s death benefit and allowing the policy to build cash value.
Understanding the Cash Value of Permanent Life Insurance
Permanent life insurance policies are sometimes referred to as cash value life insurance policies because the policy builds a cash value alongside maintaining the death benefit. You can typically borrow funds from the total cash value of your policy to help support other financial needs, such as a child’s college education or covering medical expenses.
This cash value savings capability means premiums for permanent life insurance are often higher than term life insurance policies. That being said, your premium on your permanent policy will remain the same as long as the policy is in force.
Types of Permanent Life Insurance
Learn more about the two types of permanent life insurance.
Lifetime Coverage – Whole life insurance provides coverage for a lifetime.
Set Premium – The premium you pay for the first month is what you’ll pay for every month the policy is in force.
Cash Value – As your premiums accrue, and at a time specified by the insurance company, you can borrow against your whole life policy’s cash value.
Lifetime Coverage – Much like whole life insurance, universal life insurance provides coverage for a lifetime.
Flexible Premium – Universal life insurance policies are typically more flexible than other types of life insurance. Although premiums tend to be high, you get to determine what premium you pay between the minimum and maximum set amount and can adjust your death benefit based on cash value.
Here’s What You Need To Know About Permanent Life Insurance
There are varying advantages and disadvantages to think about when considering permanent life insurance.
Key Advantages of Permanent Life Insurance
Lasts a Lifetime: One policy lasts your entire life. No worries about having to convert to another policy when a term runs out.
No Cost Surprises: The premium set at the purchase of the policy stays the same for the rest of your life.
Cash Resource: Accrues a cash value that grows at a specified rate each time you pay a premium. You may be able to borrow against that cash value tax-free (or cancel it for part or all of the cash value) once it reaches a certain amount (with interest).
Pre-planned Inheritance: Pays a death benefit to one or more beneficiaries that you choose. Family, friends, business partners, charities—it’s up to you. The benefit paid to all beneficiaries is tax-free.
Good for Estate and Retirement Planning: Because you can’t outlive a permanent policy, permanent life insurance is more suitable than term life insurance for this purpose. Additionally, the cash value grows tax-deferred like retirement account gains. In some cases, you may even borrow against or withdraw the cash value of your life insurance policy to supplement income during retirement. This money can be used in many ways, from providing income without impacting your tax bracket to covering costs for dependents who will require lifelong care.
Potential Disadvantages of Permanent Life Insurance
Higher Premiums: Because permanent policies provide a lifetime of coverage and generate cash value, the premiums are much higher than they would be for term life insurance—typically 10 times the cost of a term life policy. The high cost might not fit your budget or cause you to buy less life insurance coverage than you need.
Complexity: There’s a complex relationship between how premiums are set and cash values are determined, among other things that dictate the design of a permanent life insurance policy. Purchasing such a policy generally requires more research, planning and professional help to avoid surprises later on.
Risk-to-Value Ratio: Economic conditions can adversely impact the value of a permanent life insurance policy because the cash value growth is impacted by the market. Your cash value could be reduced over time or you may need to reduce the death benefit at some point.
Loan Default Penalty: If you borrow against your policy but pass away before the loan is paid back, that amount will be deducted from the benefit paid to your beneficiaries.
Frequently Asked Questions (FAQs) about Permanent Life Insurance
Do I need permanent life insurance?
While term life insurance policies tend to be sufficient for most people, permanent life insurance policies can make sense for those with complex financial needs, including:
- High-income earners who are seeking an additional vehicle for tax-deferred savings
- Individuals with special needs children or other lifelong dependents
- High net-worth individuals who are looking to build an inheritance for their family
- Seniors who have outlived their term life insurance coverage and are still interested in substantial coverage
- People whose family history indicates they may develop a chronic condition in the future (such as cancer or heart disease) that could make becoming insured challenging.
What alternatives are there to permanent life insurance?
The first and most popular alternative to a permanent life insurance policy is term life insurance. Term life insurance is a smart way to create financial protection for your loved ones and can cost up to 10 times less than whole life insurance.
What are the best permanent life insurance companies?
There are a number of highly rated insurance companies that offer permanent life insurance, and SelectQuote works with some of the most trusted carriers. Learn more about the insurance companies we work with.
Why are permanent life insurance rates higher than term life insurance policies?
With permanent life insurance, your premiums never change. The rate you pay in the beginning is what you’ll pay every month for life.
When you buy permanent life insurance, the insurance company sets a premium based on your age (and other factors) at the time you purchase your policy, but it also takes into consideration that the older you are, the greater the risk that you will pass away. The higher starting premium helps the insurance company mitigate that risk.
This is one of the main reasons permanent life insurance can be about 10 times more expensive than term life insurance.
Learn More About Permanent Life Insurance with SelectQuote
Navigating the complexities of the different types of life insurance can be overwhelming, but we can help. We’ll learn about your needs and help you decide what kind of life insurance policy is the right fit for you. In just minutes, we can provide unbiased quotes from some of the most trusted insurance companies.