Permanent Life Insurance
Permanent life insurance typically guarantees an income-tax-free payment when the policyholder passes away. These insurance policies also build cash value, which policyholders can use while they’re still alive.
What is permanent life insurance?
Assuming the policyholder stays on top of their monthly premiums, when they pass away, the insurance company distributes a payout, called a death benefit, to their beneficiaries—whether it’s five or fifty years after the policy was purchased. With permanent life insurance, you’re essentially covered for life.
There’s also a cash value element. A portion of the paid monthly premiums are placed in an interest-earning account (or, in some cases, invested in the stock market). Policyholders can borrow against the cash value of their policy, or use the cash value to cover their premium payments. When the policyholder dies, the life insurance company keeps the cash value, and the beneficiaries only receive the death benefit.
What is the difference between term and permanent life insurance?
With term life insurance, the policyholder chooses an amount of time (the “term”) for their coverage. They pay the same monthly premium for the length of the term, and if they’re still alive after the term is over, there’s no payout.
With term life insurance, the insurance company only offers a death benefit, with no cash value element. As far as life insurance goes, it doesn’t get much simpler than a term life insurance policy.
So why would anyone choose term life insurance over permanent life insurance? The price might be one factor. Because it’s likely that the policyholder will outlive their term life insurance policy, the insurance company can afford to make premiums relatively low. For example, Lemonade’s term life offering has monthly premiums as low at $9 a month. With a permanent policy, you may be paying hundreds of dollars a month in premiums.
What are the different types of permanent life insurance?
There are several different permanent life insurance products on the market today:
Whole life insurance Whole life insurance covers the policyholder for the duration of their life, and builds cash value steadily over time.
Universal life insurance allows you to adjust your premium payments without buying a new policy.
Variable life insurance builds cash value via premiums being invested in the stock market.
Variable universal life insurance, a hybrid of variable and universal, allows the policyholder to change the premium and the death benefit, while also investing the cash value in the stock market.
Indexed universal life insurance earns interest based on stock indexes, though money is not directly invested in the market.
What are the advantages of permanent life insurance?
The typically guaranteed death benefit helps ensure that the policyholder’s loved ones get financial support when they die. For some people, this guarantee provides some much needed peace of mind. For example, if you have a child with special needs or a chronic illness, a permanent policy can go a long way towards helping to guarantee that your loved one will be financially taken care of after you’re gone.
The cash value element of can also be appealing—especially for very high-earners.
- Permanent life insurance can help supplement your retirement income.
- If you have a large estate (valued at over $11.7 million, according to the IRS), it will eventually be subject to estate taxes. If you take out a permanent policy, your loved ones can use the death benefit to help cover those taxes.
- If you want to distribute your assets among your loved ones, an insurance policy could be a tax-free way to share your wealth.
What are the downsides of permanent life insurance?
The main downside to permanent life insurance might be the price. The premiums can be from five to fifteen times as high as for term life insurance for the same amount of coverage. If the policyholder can’t afford the premiums, they may have to walk away from the policy. And, of course, if you don’t make your payments, the policy lapses and you lose your coverage.
And while the interest-earning cash value component might sound appealing, there are a few things to keep in mind:
- Policies can take years, even decades, to build cash value.
- If you borrow money against the policy’s cash value before you die, you’ll need to repay those loans with interest. If you don’t repay those loans, the death benefit will be reduced.
When you pass away, the insurance company only pays the death benefit out to your beneficiary. The beneficiary typically does not get the accrued cash value of your account. The insurer keeps that.
How much does permanent life insurance cost?
The cost of your monthly premiums depend on several factors, including:
- Family health history
- If you’re a smoker
- If you participate in high-risk activities (skydiving, anyone?)
- How much coverage you want
Young, healthy people are less risky and cheaper to ensure, so no matter the life insurance policy, it will probably be cheaper to take out the policy sooner rather than later.
How much coverage you want will also affect your monthly premiums. If you want the death benefit payout to be a million dollars when you die, your premiums will be higher than if you want the payout to be $100,000.