Permanent Life Insurance: What It Is and How It Works

An answer booklet to all your questions about Permanent Life Insurance.

start

We all want the good, stable times to always be there.

You’re living a financially peaceful life today and you want the same 20 years down the lane. But sometimes that doesn’t happen. Your financial condition isn’t going to stay the same.

In the next 20 years you will have far greater expenses that your income today or then would be able to cover. College fee, house downpayment, vacations- everything will require a huge chunk of money.

While your financial situation today is temporary, there is one option that you can make it permanent. So that after a decade or two, you and your family are able to enjoy the fruit of your hard work today.

In such a case, permanent life insurance policy is what helps people plan ahead.

Sounds interesting, right? Well, it is.

What is a Permanent Life Insurance Policy?

When you’re even thinking about getting yourself insured, you must be thinking, what does permanent life insurance mean?

Just like the name suggests, a permanent life insurance policy insures you for your life, and comes without an expiration date. The policy remains intact during your whole life and starts the moment you sign the documents and is in force until you die.

A permanent life insurance policy has two major components: a cash value and a death benefit.

Cash value is the sum accumulated when you pay your policy through premiums, the more you pay, the more cash value it will grow. This ‘savings’ component can be accessed while the policyholder is still alive and can be used to cover expenses during their life.

A death benefit component is basically the amount of money paid to the policyholder’s beneficiaries on account of their death. This death benefit sum cannot be accessed while the insured person is still alive.

How does Permanent Life Insurance work?

The only way to keep this policy in force is prompt payment of premiums each month/annually depending upon the agreement.

Permanent Life Insurance Cash Value

If you want to access the cash value during your life, you can do so by:

  • Making a withdrawal
  • Taking a loan
  • Surrendering the policy altogether
  • Allocating cash value to pay for premiums

When you’re making a withdrawal, it is tax-deferred, but it will reduce the death payout as well.

Surrendering the policy is a tricky business, it actually means that you’re cancelling the policy and you’re no longer insured.

What will happen?

Chances are that opting for this option will be very expensive for you, because upon surrendering, your insurer could cut any pending loans or premiums and may also charge you a ‘small’- which is never a small surrender fee. And, unlike withdrawal, you may be charged an income tax on the money to get after surrendering your policy.

So maybe you shouldn’t be considering surrendering it, rather think about withdrawals or even taking a loan to cover unexpected expenses.

Is Permanent Life Insurance the same as Whole Life Insurance?

A permanent whole life insurance is almost the same as whole life insurance, rather imagine it as a bigger umbrella. The most common type of permanent life insurance is called ordinary life or whole life insurance.

The two primary components of a permanent life insurance policy are whole life insurance and universal life insurance.

Whole life insurance comes as a primary part under the main umbrella of permanent life insurance, and also has a death benefit and accumulated cash value. The process of a whole life insurance is a little more complicated and has higher premiums too, but the main purpose is the same as permanent life insurance- permanent coverage for your whole life.

What type of Insurance offers Permanent Life Coverage with Premiums that are payable for life?

Whole Life Insurance!

Term vs Permanent Life Insurance

Now that we know what permanent life insurance is, let’s make a logical comparison with term life insurance.

A term life insurance policy is designated to a policyholder for only a term- which is only a couple of years. There is guaranteed death benefit which the beneficiaries of the policyholder will receive upon their death. Premiums are very low because this type of insurance covers only for a specific number of years; usually 10-30 years.

Term life insurance does NOT have an accumulated cash value component that you can use as savings during your life, it ONLY has a death benefit. While the policyholder is alive, they can’t make use of the term life insurance policy.

But what if you outlive your term?

Well, that is very much possible. In case you outlive your term, you will have to renew your policy and start with the process all over again WITHOUT receiving any sort of benefit from the policy and its first phase.

This is the difference between term and permanent life insurance.

So how do you choose which one is better for you?

Choosing between permanent life insurance vs term depends on your end goal. When you align your objectives as to what you hope to achieve at the end of your policy, it will help you decide which insurance is best for you.

For people who are earning well today and are close to retirement in the next couple of years may choose term life insurance because it gives a death payout to beneficiaries. This is the kind of financial protection that looks after your family when you die, the lump sum amount can then be used by your family to pay off mortgage, cover funeral costs and spend on daily running of the house.

A permanent life insurance policy may be helpful when you’re just starting a family and very well expect huge expenses in the near future. In such a case not only will you have a death benefit but also an amount that you can extract from your policy during your life to be used. Of course, the premiums are also a lot higher (and also fixed) than that of a term life insurance.

Types of Permanent Life Insurance

What are the different types of permanent life insurance?

It is important to know all types so it makes it easier for you to decide your future. These will help you conclude better on what is the best permanent life insurance plan you should opt for.

mid
  • Whole Life Insurance: Another name for permanent life insurance is whole life insurance. This has fixed premiums, guaranteed death benefit and a cash value that you can use while you’re still alive.
  • Permanent Universal Life Insurance: Allows a certain amount of flexibility while paying for premiums as long as you pay the minimum amount required, and this also has an accumulated cash value that grows with time.
  • Variable Life Insurance: This type of insurance allows the insured person to use their cash value of permanent life insurance as an investment component managed by the insurance company itself. If your investments do well, the earning could be used to increase your cash value account and vice versa; bad investment performance will lead to a decrease in cash value and death payout.
  • Survivorship Life Insurance: This type of policy insures two people at the same time; usually husband and wife. The death payout is inherited by beneficiaries when BOTH policyholders die. No death benefit for beneficiaries if one dies and the other is alive. Which means that the spouse alive will have to pay the remaining premiums. Insuring two people separately costs more than two people at the same time under this type of policy, which is why people prefer survivorship life insurance better.

Permanent Life Insurance Laws

There are certain permanent life insurance tax benefits attached to this type of insurance policy. And some legal requirements too.

The death benefit that beneficiaries receive is NOT accountable to any sort of income tax. But if there are any internal gains in the cash value, there might be some amount of tax applied.

In the case of surrendering the policy, any premiums or cash benefits you have received during the life of the policy will be charged as normal income tax. This is one reason like mentioned above why people choose to either make a withdrawal or take a loan rather than surrendering the policy altogether.

Other than taxation, there are some legal requirements for the policy to be in force. There are specific documents that you submit along with some of your personal information as records. Your insurance company will guide you better on what sort of requirements are there and what insurance laws are.

Permanent Life Insurance Pros and Cons

It is always best to evaluate a certain life insurance to see which one suits you better, and the best way of doing that is weighing its pros and cons against each other.

What are the benefits of Permanent Life Insurance?

Pros:

  • No taxes applicable on interest growth
  • Whole life coverage
  • Can borrow/withdraw against cash value
  • May have illness cover if you’re very sick
  • No income tax if you receive dividends

Why Permanent Life Insurance is a Bad Investment?

Cons:

  • Higher premiums
  • Dividends are not guaranteed
  • Takes a very long time to build a reasonable cash value

It is important to evaluate the pros and cons well, most experts say it is a bad idea, but if the pros make more sense to you, you should absolutely go for it.

Permanent Life Insurance for Child

There are a lot of people who seriously consider having their child insured for their whole life. Just like the policy would work on an adult, it does on the child. A savings component builds cash value over time and the premiums are obviously a little higher.

But why do people even opt for insuring their child?

One reason is the age factor. Since the child is of less age, chances are that the agreed premium at the time of application will be relatively less.

If the child is diagnosed with some illness while young, chances are that he can still get permanent life insurance which may make it hard for him when he’s a little old and the medical condition worsens. Or, if in an unfortunate circumstance the child dies, his parents (expected beneficiaries) will receive a guaranteed death benefit to cover funeral costs and other expenses. This is a good permanent life insurance for long term care.

But now the question is, is permanent life insurance worth it for a child?

If a child is healthy and there is no family history of any genetic disease, or cancer or diabetes, chances of the child getting sick during his life are very low. So why do you want to keep paying high premiums when there is no immediate benefit? Sure, there is an accumulated cash benefit that you can use while the child is alive, but that would take almost 10-15 years to mature and build value.

Permanent Life Insurance for Seniors

A permanent life insurance retirement planning is important to think about, especially when you’re near your retirement. For that, looking for a suitable life insurance policy is a significant part and for that, you need to first answer a few questions yourself.

What amount of coverage are you looking for? Can you afford paying premiums? Which type of policy is best for your family?

When you evaluate your financial condition you will know your answer.

Many seniors choose permanent life insurance to take advantage from the accumulated cash value to use during their life. This could be used to pay off outstanding debt or pay for your childrens’ wedding. And of course, a death payout to ensure a stable financial condition for your spouse and children.

Permanent Life Insurance Quotes No Medical Exam

Many seniors believe that once they’ve reached a certain age their health is deteriorated. So this means less chances of passing a medical exam.

But, good news, not all insurance policies require a medical exam!

A final expense insurance which is also known as burial insurance is a type typically applied to for paying funeral costs. Since the ultimate payout is low, for instance $10,000-$15000, the premiums paid are also very affordable. The quote per month could amount to as low as $15-$18 a month. This is one cheap permanent life insurance for seniors, and it requires no medical exam!

What is AARP Permanent Life Insurance?

AARP stands for American Association of Retired Persons.

An AARP insurance program gives permanent coverage to policyholders as long as all premiums are paid on time. This program allows almost every senior to qualify regardless of their health because this type of policy also does not require any medical exam.

Just an application that defines your status, age and a few personal questions to determine which type of policy suits you better. Easy, right?

Best Permanent Life Insurance Companies

There are many companies that provide a diverse range of insurance policies for their clients, each one specifically designed to suit their needs and requirements. Here is a list of the companies that offer permanent life insurance policies:

  1. Northwestern Mutual Permanent Life Insurance
  2. AARP Permanent Life Insurance
  3. New york Life Permanent Life Insurance
  4. MetLife Permanent Life Insurance
  5. USAA Permanent Life Insurance
  6. John Hancock
  7. Globe Permanent Life Insurance

Permanent Life Insurance Quotes

It is important to get an affordable permanent life insurance quote when you want to apply for a suitable insurance policy.

And for that the internet has many permanent life insurance quotes online through certain permanent life insurance calculator tools such as Insurance Geek from which people can get a fair estimate of what their quote will look like. However, this quote is dependent upon many factors, like age, health, financial history etc., so every person will bear a different cost of permanent life insurance policy.

Permanent Life Insurance Cost

Let’s imagine a healthy, non-smoker individual. These quotes will tell you the average cost of permanent life insurance and how much he will have to pay.

Note: These permanent life insurance rates have been extracted online, courtesy of Insurance Geek.

Age $50,000 $100,000 $250,000
37 $63 $105 $254
42 $74 $130 $317
47 $92 $162 $397
52 $116 $205 $505
57 $147 $260 $642

Is Permanent Life Insurance a Good Investment?

Having a lifetime coverage surely sounds like a great idea; cash being accumulated in the savings component to be used later in life AND a death benefit that will favour your beneficiaries after you die.

But before you jump to any conclusions, you need to evaluate everything yourself first, including your health, financial condition and future goals. You need to ask yourself questions like why do i need this? Is there a better option? How much is permanent life insurance? Can I make it work without being insured?

Even though the premiums are higher but if your financial condition allows you to pay them on time, and you have a major expense 20 years down the road (debt repayment, college tuition) then it is a good idea for you. If a permanent life insurance with long term care is what you need, go for it.

But if you don’t have any dependents or are just looking for a payout to benefit your spouse that they will only make use of after you die, then a term life insurance is the best option! Lower premiums and a guaranteed death payout.

Whatever you choose, just make sure all your pros and cons are rightly weighed and you’re able to make a wise decision concerning the wellbeing of your family.

end

Charles Bains

Charles Bains

Charles Bains started his insurance career as a marketing intern before pounding the pavement as a commercial lines agent in Orlando, FL. As an industry journalist, his articles have appeared in a variety of trade publications. His insurance television career, short-lived but glorious, once saw him serve as the expert adviser on an insurance-themed infomercial (yes, you read that correctly). Having recently worked for various organizations, coupled with his broader insurance knowledge, Charles is able to understand our client’s needs and guide them accordingly. He is a gem for Insurance Noon as his wide area of expertise and experience have been beneficial in conducting further researches to come up with solutions and writing them in a manner which is easy for everyone including beginners to comprehend.

Leave a Reply

Insurance Noon is the world's leading source of insurance related content on the web, focusing on industry news, buying guides, reviews, and much more.