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What Is Permanent Life Insurance & How Does It Work?

permanent life labelLife insurance is an important tool that provides peace of mind for those who don’t want to leave a financial burden for their loved ones after they pass away. It provides a safety net that can pay off your debts, replace your missing income, cover your funeral costs, and pay for any other final expenses you leave behind.

While you have many life insurance options, your choice comes down to two main types: term and permanent life insurance. Unlike term policies, permanent life insurance never expires. There are also several different types of permanent life insurance, so no matter your needs or budget, you can find a policy that provides a safety net for your loved ones after you pass away.

What Is Permanent Life Insurance?

Permanent life insurance, sometimes called cash value life insurance, refers to any type of policy that doesn’t expire. Unlike term life insurance, permanent coverage generally lasts your entire lifetime as long as you pay the premiums. In some cases, permanent life insurance has a maturity date, but the owner (or their beneficiaries) still receives a lump sum payment.

There are many benefits to permanent life insurance. These policies:

  • Provide a death benefit of as little as $5,000 or as much as $1,000,000.
  • Have a savings portion that builds cash value.
  • Allow policyholders to borrow funds from the cash value component.
  • Sometimes allow you to permanently withdraw money from the savings fund.

Because permanent life insurance offers a death benefit and a cash value component, it’s a great tool for many people. Those with a partner, spouse, or other dependant(s) whose finances would be impacted with the loss of their income can benefit greatly from this type of coverage. Individuals who are newly-retired or nearing retirement and want to set aside funds for their final expenses and ongoing care of their loved ones also often choose these policies.

What Is Accumulated Cash Value in a Permanent Life Insurance Policy?

Part of a permanent life insurance policy’s monthly premiums go toward its accumulated cash value component. Depending on the type of policy you have, this fund earns interest based on a calculation determined by your insurance company, current market rates, or the stock market. Your beneficiaries won’t receive this money after you pass away, however, after a waiting period you can use it in a variety of ways. You can use your accumulated cash:

  • To pay expenses like medical bills, home and auto loans, or any other cost you need to cover.
  • To pay your premiums. Once you’ve built up a certain amount, you can use the money to make your monthly payments rather than paying them out of pocket. This frees up cash for you to pay for other living expenses. However, if you use up all of your cash value to pay your premiums and are no longer able to pay them on your own, your policy will lapse.
  • As a personal loan. People can often borrow at a lower interest rate from their accumulated cash value than they would if they borrowed from a bank or another financial institution.
  • To permanently pull funds. Some policies offer the option of pulling out money in exchange for a lower death benefit. Keep in mind this might not always be dollar-for-dollar, because some companies have high withdrawal penalties. For example, for every $1 you take out, $2 may be deducted from your death benefit.
  • As a lump sum payment. You can receive all of your accrued cash value in exchange for surrendering your policy, which includes cancelling the death benefit. This means your loved ones won’t receive any insurance money when you die. Plus, because this withdrawal is considered income, it may be subject to taxes.

It’s important to know that if you borrow money from your cash value and don’t pay it and any accrued interest back, this amount will be deducted from the death benefit given to your beneficiaries. Because there are so many considerations to make if you use your accumulated cash value, check with your provider about the details of your policy as well as your financial planner before withdrawing any money.

If you don’t have any use for the cash, some life insurance companies may let you trade in your cash value for a larger death benefit. When this happens, you lose your savings component and have all or some of its value applied to the payout your loved ones receive when you pass away. For example, if you have a death benefit of $400,000 and an accumulated cash value of $100,000, your new death benefit could be as high as $500,000, depending on your provider.

Types of Permanent Life Insurance

Whole Life

Sometimes called ordinary life, whole life insurance is the most common type of permanent coverage, and it comes in a few different forms. The premiums and the death benefit are fixed throughout the life of the policy.

Like all permanent policies, they have a cash value component. This fund accrues more slowly than some other types of coverage, but it’s a stabler investment because it earns interest at a rate set by your insurer, not the stock market. Some policies also pay dividends on the cash value they build, which can be reinvested or dispersed to another of your financial accounts.

Burial or Funeral

Burial or funeral insurance is also known as final expense insurance. It’s a whole life policy with a smaller death benefit than other types of coverage, usually between $5,000 and $20,000. It’s designed to pay for the costs of final arrangements, such as:

  • Memorial service
  • Funeral
  • Casket or urn
  • Headstone

However, the money can be used to pay for any of your final expenses. Families often use leftover funds to cover costs like medical bills, personal loans, and mortgages after their loved one’s final arrangements are paid.

Funeral insurance is an especially good life insurance option for seniors over 50, even those in poor health. It doesn’t require a medical exam, and there are usually only a few health questions you need to answer to qualify.

Guaranteed Issue Whole Life

Sometimes called guaranteed acceptance life insurance, these policies don’t require you to take a medical exam, answer health questions, or submit medical records to get coverage. However, there is a waiting period between being accepted and when your loved ones are eligible to receive your death benefit, usually two or three years. If you pass away during this period, the insurer repays your paid premiums to your beneficiaries with interest (usually at a rate of 10 percent or less).

Universal Life

Also known as adjustable life, one of the advantages of universal life insurance is that these policies tend to be more flexible than whole life. The big difference between whole life and universal life is the added options universal offers. For example, you can often take a medical exam to increase your death benefit or apply your accrued cash toward your monthly premium payments.

Using your cash component to pay premiums is a good option for those who need a break from making payments so they can use the money for other expenses, but you’ll need to keep a balance to keep the policy from lapsing. You also may be able to add your cash value to your death benefit in order to leave a bigger payout to your beneficiaries, but these policies tend to be more expensive than other types of permanent life insurance.

Guaranteed Universal Life

Applicants are guaranteed acceptance for this type of universal life policy. There are no health exams or questions, so because the insurer is taking a risk on the insured, premiums are significantly higher than on other types of policies. There is also a waiting period of two to four years before loved ones can receive the death benefit. Insurers also often cancel these policies after a single missed payment, making it critical to pay them on time and in full every month.

Indexed Universal Life

This type of universal life policy is attached to a stock index, such as the NASDAQ, S&P, or Dow Jones. Although they usually have a guaranteed interest rate for savings accounts, the rates aren’t fixed. This means they can change for better or for worse, either increasing or decreasing your accumulated cash value and overall payout upon death.

Variable Life

With this policy, you can invest your cash value in a stock market account managed by your provider, either stocks, bonds, or mutual funds. Earnings can be paid into your savings account or death benefit. However, as with most types of investment accounts, you also risk losing money, which will reduce your accumulated cash value or your overall death benefit. Some variable life insurance policies have a guaranteed death benefit amount as a layer of protection from an investment that doesn’t perform well.

Variable-Universal Life

Just like traditional variable life, policyholders have investment options that may boost or lower their accumulated cash value or death benefit. You also get the qualities of universal life insurance in that you can make changes to your premiums and death benefit.

Survivorship

A form of family life insurance, these policies insure two people at the same time, usually spouses. They’re paid out when the second person dies. These are often used as a way of qualifying for tax deductions in estate planning.

Permanent Life Insurance vs. Term Life Insurance

Unlike permanent life insurance, term life insurance doesn’t last a lifetime. It expires after a set number of years, usually 10, 20, or 30. While it has lower premiums than permanent policies that never change, it doesn’t build cash value you can access to pay for living expenses.

Term life insurance usually appeals to people who want to pay low premiums. Younger adults who don’t have a lot to spend on monthly payments but want assurance their debts will be paid if they pass away unexpectedly often buy it. While their premiums are lower, term policies often expire while the owner is still living, so to get more coverage, they have to buy a new policy at a higher rate.

This is why many term life insurance companies offer policyholders the option of converting their coverage into permanent life insurance. Many times they aren’t required to take a medical exam or even complete a health questionnaire, so their acceptance is usually guaranteed as long as their premiums are up to date. Converting a term policy to permanent life insurance can be a good option for those with medical issues who may have a hard time qualifying for a new permanent policy and would benefit from a cash value component.

Permanent life insurance policies have higher premiums than term life insurance. However, because they stay in effect for your whole life and offer the ability to withdraw cash to pay for your living expenses, they offer more financial security than term life insurance. Applying when you’re young and in good health gives you better rates than when you’re buying life insurance in your 60s, buying life insurance in your 70s, or buying life insurance in your 80s and potentially facing medical issues.

Permanent Life Insurance Cost

Different life insurance companies offer permanent coverage to different age groups. Below are average insurance costs for some of the most popular permanent life insurance policies. As you can see, prices increase the older you are, and women pay less in premiums than men.

Average Burial or Funeral Insurance Cost

Monthly Premium Rates for Men*

$5,000 Death Benefit
AgeDetermined 'In Good Health' by InsurerNo Health Questions Asked
50$16$20
55$19$24
60$23$29
65$29$35
70$38$44
75$51$63
80$65$82

* Estimated rates do not reflect the rates of any particular life insurance company.

$10,000 Death Benefit
AgeDetermined 'In Good Health' by InsurerNo Health Questions Asked
50$30$40
55$35$46
60$43$57
65$56$68
70$74$88
75$100$125
80$126$162

* Estimated rates do not reflect the rates of any particular life insurance company.

Monthly Premium Rates for Women*

$5,000 Death Benefit
AgeDetermined 'In Good Health' by InsurerNo Health Questions Asked
50$14$15
55$16$18
60$18$24
65$22$28
70$28$35
75$38$46
80$48$64

* Estimated rates do not reflect the rates of any particular life insurance company.

$10,000 Death Benefit
AgeDetermined ‘In Good Health’ by InsurerNo Health Questions Asked
50$25$28
55$28$36
60$33$45
65$41$55
70$53$69
75$72$90
80$93$126

* Estimated rates do not reflect the rates of any particular life insurance company.

Whole Life Insurance Cost

Average Annual Whole Life Insurance Rates for Men*
AgePolicy AmountAverage Rate
60$250,00$9,110
60$500,000$18,165
60$1,000,000$35,810
70$100,000$2,820
70$150,000$6,540
70$250,000$16,320
75$100,000$3,750
75$150,000$8,880
75$250,000$22,440

* Estimated rates do not reflect the rates of any particular life insurance company.

Average Annual Whole Life Insurance Rates for Women*
AgePolicy AmountAverage Rate
60$250,000$7,530
60$500,000$15,100
60$1,000,000$29,545
70$100,000$2,300
70$150,000$5,460
70$250,000$13,440
75$100,000$2,950
75$150,000$7,950
75$250,000$18,450

* Estimated rates do not reflect the rates of any particular life insurance company.

Guaranteed Issue Whole Life Insurance Cost

Average Annual Guaranteed Issue Whole Life Insurance Rates for Men*
AgePolicy AmountAverage Rate
50$15,000$750
50$20,000$995
55$15,000$880
55$20,000$1,165
60$15,000$1,045
60$20,000$1,380
65$15,000$1,240
65$20,000$1,645
70$15,000$1,610
70$20,000$2,145
75$15,000$2,215
75$20,000$2,945

* Estimated rates do not reflect the rates of any particular life insurance company.

Average Annual Guaranteed Issue Whole Life Insurance Rates for Women*
AgePolicy AmountAverage Rate
50$15,000$560
50$20,000$805
55$15,000$670
55$20,000$970
60$15,000$795
60$20,000$1,140
65$15,000$960
65$20,000$1,375
70$15,000$1,245
70$20,000$1,790
75$15,000$1,700
75$20,000$2,445

* Estimated rates do not reflect the rates of any particular life insurance company.

Universal Life Insurance Cost

Average Annual Universal Life Insurance Rates for Men*
AgePolicy AmountAverage Rate
60$250,000-$1,000,000$7,525-$29,855
65$250,000-$1,000,000Talk to you provider.

* Estimated rates do not reflect the rates of any particular life insurance company.

Average Annual Universal Life Insurance Rates for Women*
AgePolicy AmountAverage Rate
60$250,000-$1,000,000$6,550 -$25,945
65$250,000-$1,000,000Talk to you provider.

* Estimated rates do not reflect the rates of any particular life insurance company.

Guaranteed Universal Life Insurance Cost

Average Annual Guaranteed Universal Life Insurance Rates for Men*
AgePolicy AmountAverage Rate
60$50,000-$250,000$1,415-$4,595
65$50,000-$250,000$1,910-$6,240
70$50,000-$250,000$2,580-$9,830
75$50,000-$250,000$9,840-$10,850
80$10,000-$20,000$2,490-$6,480
85$10,000-$20,000$3,600-$7,140

* Estimated rates do not reflect the rates of any particular life insurance company.

Average Annual Guaranteed Universal Life Insurance Rates for Women*
AgePolicy AmountAverage Rate
60$50,000-$250,000$1,260-$3,890
65$50,000-$250,000$1,680-$5,150
70$50,000-$250,000$2,180-$6,125
75$50,000-$250,000$6,140-$8,850
80$10,000-$20,000$2,100-$4,620
85$10,000-$20,000$2,460-$4,860

* Estimated rates do not reflect the rates of any particular life insurance company.

Indexed Universal Life Insurance Cost

Average Indexed Universal Life Insurance Rates for Men*
AgePolicy AmountAverage Rate
40$250,000$3,095
45$250,000$4,030
50$250,000$5,230
55$250,000$7,020
60$250,000$9,335

* Estimated rates do not reflect the rates of any particular life insurance company.

Average Indexed Universal Life Insurance Rates for Women*
AgePolicy AmountAverage Rate
40$250,000$2,710
45$250,000$3,505
50$250,000$4,510
55$250,000$6,025
60$250,000$7,980

* Estimated rates do not reflect the rates of any particular life insurance company.

Permanent Life Insurance Pros & Cons

There are many pros to permanent life insurance, but there are a few cons as well. It’s important to think about both when deciding if this is the right coverage for you.

ProsCons
Most policies last your entire lifetimeSome have a maturity date when you’re paid out before you pass away
Accrue cash value you can access as a loan or permanent lump sum, or use for premium paymentsBorrowed or withdrawn money from the cash value is deducted from death benefit if not paid back
Many policies don’t require a medical exam or health questionnaire to qualifyGuaranteed policies have high premiums and a waiting period for death benefit eligibility
May offer tax advantagesSome cash value withdrawals are taxed as income
Can cover more than one person, usually spouses or a parent and childCan’t be converted to a different policy if you no longer need the coverage you originally signed up for

FAQs

What’s the difference between permanent life insurance and term life insurance?

While term life insurance expires after a certain period, permanent coverage usually lasts until the policyholder(s) passes away or cancels or surrenders it. It also builds cash value you can access as a loan or permanent withdrawal, an option that isn’t available with term policies.

Does permanent life insurance have a maturity date?

Some permanent insurance policies mature, usually when the owner turns 100 or 121. In some cases when this happens, the owner no longer has to pay premiums but their beneficiaries will still receive the death benefit after they die. Other policies pay out the accumulated cash value, the death benefit, or a predetermined lump sum. Either way, unlike with most term life insurance, owners receive money if they “outlive” their policy.

What is cash value life insurance?

This is another term for permanent life insurance. It refers to the cash value component of these policies. Part of your monthly premiums are applied to this savings fund, which you can borrow against to pay for living expenses or even future premium payments. Some insurers also allow you to permanently withdraw up to a certain amount. However, anything you don’t pay back to your provider will be deducted from the death benefit your loved ones receive after you die.

Can I convert a term life insurance policy into a permanent life insurance policy?

Some companies allow you to convert a term life insurance policy into a permanent one. You can often convert your policy without taking any kind of medical exam as long as your premium payments are up to date.

Do I have to pay taxes on my permanent life insurance policy’s cash value?

The money that builds in a permanent insurance policy usually isn’t considered income, so most policyholders don’t pay taxes on their policy’s earnings if the cash stays in their account.

Do I have to pay taxes on money I borrow from a permanent life insurance policy?

You may be taxed on money you borrow or permanently withdraw from your policy’s cash value. Talk to your tax advisor about what to expect before taking any money out of your cash value component.

Do I need permanent life insurance?

When thinking about what kind of life insurance to get, there are a lot of considerations to be made. While term life insurance has certain benefits, including low monthly premiums, it’s only temporary coverage. As long as you keep up with your payments, permanent life insurance lasts a lifetime. Plus, there are many different kinds of permanent life insurance products to choose from, so no matter your coverage needs, health, or age, you can find a solution that’s right for you. Permanent life insurance helps financially protect your loved ones so they have the support they need to cover your outstanding debts and final expenses after you pass away.

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