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Among the many rites of passage that signal you're finally a grownup, few are as sobering as shopping for life insurance. As you investigate your life insurance options, you may hear the term "permanent life insurance." While term life insurance lasts for a certain term—such as 20 years—permanent life insurance policies last your whole life (or up to 99 years of age, depending on the policy). Over time, they can earn cash value in addition to providing for your beneficiaries upon your death. Permanent life insurance can make sense for some people, but is it right for you?
How Permanent Life Insurance Works
Permanent life insurance lasts your entire life or up to 99 years of age as long as you pay the premiums, which typically stay the same throughout your lifetime. No matter how old you are, your beneficiaries receive a payout, called a death benefit, when you die while your policy is still active. In addition to the death benefit, permanent life insurance has a cash value that accumulates and earns interest over time.
Here's how this works: Part of your monthly insurance premium goes into a cash value account, and the insurance company pays dividends on this amount at a guaranteed interest rate (typically between 1% and 2% annually). You pay no taxes on the money you contribute to this account and aren't taxed on any gains until you withdraw the money.
At your death, the cash value (also called the face value) of the policy reverts to the insurance carrier. If you'd prefer it to go to your survivors, most policies let you exchange the cash value for an equal increase in the death benefit.
Permanent life insurance can benefit you as well as your heirs. As you build up cash value in your policy, you can use it in several ways. Suffering financial hardship? Use the cash value to pay the insurance premiums. Need to pay for a child's wedding? Withdraw some or all of the cash value or borrow from the insurance carrier using the cash value as collateral, without a credit check. (Know that withdrawing all the cash value cancels your insurance coverage. This is called surrendering the policy and can trigger surrender fees and tax consequences.)
There are two main types of permanent life insurance: whole life and universal life. Both offer guaranteed cash value. You can't change the coverage or adjust the premiums once you've purchased whole life insurance. Universal life insurance is more flexible; you can vary your premium payments and modify your coverage if you choose.
Variable life insurance is another kind of permanent life insurance. Unlike whole and universal life, it offers no guarantee your cash value will increase. Instead, it gives you the option to select different investments for your cash account, which could offer higher returns than whole or universal life.
Pros and Cons of Permanent Life Insurance
To decide if permanent life insurance makes sense for you, consider the pros and cons.
Pros
- Insurance lasts your entire life if you keep paying the premiums
- Premiums typically stay the same, even as you age
- The rate of return is a guaranteed rate if you have whole or universal life
- You can access the account's cash value
Cons
- Expensive, costing up to 15 times more than term life insurance for the same coverage
- If you die without withdrawing the cash value or adding it to the death benefit, it goes to the insurance company
- Low rate of return compared to many investments
- Any money borrowed or withdrawn reduces the death benefit
- Some policies end at 99 years of age
Permanent vs. Term Life Insurance
Term life insurance is the kind of life insurance most people purchase. As the name implies, it lasts for a set "term," which can range from one to 30 years. Premiums stay the same during the term; if you die during the term, your survivors receive the death benefit.
Once the term ends, your policy ends too. You may have the option to renew the policy, or you may need to buy a new one. Either way, you may have to undergo a medical exam to assess your health and risk level; the older you are, the higher premiums tend to be.
Many people buy term life insurance to provide for surviving family members during a certain stage of life. For example, you might get term life insurance so your spouse can put the children through college or pay off the mortgage. As you get older, you may have less need for term life insurance.
| Permanent Life vs. Term Life Insurance | |
|---|---|
| Permanent Life Insurance | Term Life Insurance |
| Lasts your whole life or up to 99 years of age, depending on the insurer | Expires when term ends |
| Premiums typically stay the same your entire life | Premiums stay the same during term |
| No need to renew | Renewal typically means higher premiums |
| Builds guaranteed cash value | No cash value |
| More expensive than term life | More affordable than permanent life |
Protection for Life
Permanent life insurance offers some advantages, including stable premiums, lifelong protection and the ability to build cash value. But because it's pricey and offers a relatively low rate of return, it's best suited for people who have already maxed out retirement vehicles such as 401(k)s and IRAs.
More and more insurance companies now check credit-based insurance scores when reviewing your application for life insurance. Although credit-based insurance scores are based on slightly different factors than consumer credit scores such as the FICO® Score☉ , having good credit in general can help you qualify for lower life insurance premiums. Before applying for any kind of life insurance, get a free copy of your credit report and check your credit score to see where you stand.