As the name implies, permanent life insurance covers you for a lifetime. As long as you continue paying the premiums, the insurer cannot cancel your policy. In addition to paying a death benefit, permanent life insurance policies also include a savings component through which your policy can build cash value.
Types of permanent life insurance
First, it’s worth noting that the terminology used to discuss permanent life insurance can be confusing. The Insurance Information Institute, for example, treats the terms “whole” and “permanent” as synonymous and uses the term “traditional whole life” to distinguish that form from other types of permanent life insurance. For our purposes, when we say, “whole life,” we mean the traditional kind.
Whole life insurance policies are typically designed to keep the premiums and the death benefit the same throughout the life of the policy, although some dividend-paying whole life policies allow you to use the dividends to purchase additional death benefits. Whole life insurance companies guarantee a minimum amount of cash value growth.
While the premiums and death benefits of whole life policies usually stay the same for the duration of the policy, universal life insurance provides more flexibility in the amount you pay in and the amount it pays out.
The cash value account in a universal life policy generally earns interest at the money market rate, according to the Insurance Information Institute. Once the account begins to accumulate funds, you can adjust your premium payments. You can opt to pay more than the amount required to cover the cost of insurance and have the excess premium applied to your cash value account. If that cash value becomes high enough, you may be able to skip a payment without losing the policy. On the other hand, if low interest earnings reduce the cash value to an amount that’s insufficient to cover the insurer’s expense to maintain the policy, you may have to start paying higher premiums.
A variable life policy offers both a greater opportunity for investment growth and a greater investment risk than a universal life policy does. The cash value account in a variable life policy is invested in several separately managed subaccounts that operate similarly to mutual funds. The money can be allocated among stocks, bonds and money market mutual funds. That means your account will generally grow a lot when the markets are good but lose money when they’re not.
Variable-universal life insurance provides the premium and death benefit flexibility of universal life insurance, along with the investment risks and growth opportunities that come with variable life insurance. While your risks and rewards are uncertain, variable-universal life policies usually place both a floor and a ceiling on the returns you get from investing your cash value account.
Term vs permanent life insurance
While permanent life insurance provides a lifetime of coverage, the coverage of a term life insurance only lasts for a set length of time, or term. Term life and permanent life insurance also differ in other important ways:
- Cost. Permanent life insurance is considerably more expensive than term life.
- Types of premiums. Term life insurance has level premiums (meaning they always stay the same), while some types of permanent life insurance have adjustable premiums.
- Cash value. Term life insurance has no cash value component, while permanent life insurance does include this feature – and some types include a variety of investment options.
How Does Permanent Life Insurance Work?
Permanent life insurance benefits have two parts: the face value, which is the amount of the death benefit, and the savings component, which is the cash value account. The value and nature of each of those elements can vary greatly depending on the type of policy.
The simplest goal when it comes to buying life insurance is getting a death benefit that adequately provides for the loved ones who need that protection. With permanent life insurance, it’s also important to take into account the fact that you’ll be paying for that protection the rest of your life. You’ll need to balance your desire for a substantial death benefit with the need to keep your premiums affordable for the long haul.
The cash value account of your permanent life insurance policy grows by earning interest on the portion of your premium that your insurer puts into it. Once the account has begun to accumulate value, you can make withdrawals and take out loans from the funds. Any withdrawals will reduce the cash value, but the death benefit will stay the same. You’ll pay interest on any loans taken from the account, and any amount you haven’t repaid by the time of your death will be deducted from the policy’s death benefit.
How Much Does Permanent Life Insurance Cost?
Because it provides lifetime coverage, permanent life insurance policies charge significantly higher premiums than term life policies. For example, a January 2020 article in NerdWallet reported average annual premium costs for men and women purchasing various amounts of coverage in whole life policies and comparing them to term life policies for the same death benefit.
A 50-year-old man would pay an average nearly $5,000 for a $250,000 whole life policy, based on those early 2020 figures, compared to about $800 for a 30-year term life policy with the same coverage. For $1,000,000 worth of coverage, he would pay more than $19,000 for a whole life policy, vs. $2,913 for a 30-year term life policy.
Premiums for women are lower. A 50-year-old woman would pay an average of about $4,200 a year for a $250,000 whole life policy, vs. about $600 for a 30-year term life policy. For a $1,000,000 death benefit, she would pay nearly $17,000 for a whole life policy, vs. about $2,100 for a 30-year whole life policy.
Pros and Cons of a Permanent Life Insurance Policy
Let’s consider some of the key advantages and disadvantages of permanent life insurance.
Why is permanent life insurance good?
- Your premium cost is locked in. With permanent life insurance, your premium will never go up because of your age or health status. Some policies give you the option of paying higher or lower premiums under certain circumstances, but if you choose to stick with your original plan, the insurer cannot increase the premium.
- It can force you to save. Maybe you recognize that your money management skills are less than stellar, especially when it comes to saving. In that case, the cash value component of a permanent life policy could serve as a vehicle for forced savings. You must continue paying your premiums if you want your life insurance coverage to stay in effect, and each time you do so a portion of the money is applied to your cash value account.
- It provides some flexibility. With some permanent life insurance policies, you have the option of adjusting your premium payments and/or death benefit amount once the policy has accumulated enough cash value.
Why is permanent life insurance bad?
- It’s extremely expensive. In fact, many people who buy permanent life insurance reach a point where they can no longer afford to keep up with the premiums, so they allow their policy to lapse, leaving them and their loved ones with nothing to show for the money they spent. Motley Fool estimates that it takes 15 to 20 years before a whole life policy accumulates more cash value than the amount of premiums paid into it. That’s because a large share of those premiums goes toward fees, commissions and various elements of the cost of insurance.
- Most people don’t need lifetime coverage. The main purpose of life insurance is to replace the financial support you provide to your loved ones. By the time you’re at or near your retirement years, you’re likely to have fewer people relying solely on your income (e.g., the kids are probably grown), and if you do want to help family members financially, you probably have other kinds of savings to do so. For those reasons, most people do best buying a term life policy to cover the years when family members are most financially dependent on them and investing the money they save in premiums costs.
- It provides poor investment return. The returns you earn from the cash-building feature of permanent life insurance stack up poorly against other kinds of investment opportunities.
- It’s really complicated. With its many variations and nuances regarding the types of policies, the available investment options, the flexibility of premium payments and more, permanent life insurance is complex and sometimes difficult to understand. It’s easy to end up not knowing exactly what you signed up for.
Sell Your Permanent Life Insurance to Avoid Lapsed Policies
Suppose you own a permanent life insurance policy that you no longer can afford. You’re at risk of losing that coverage with nothing to show for the premiums you’ve already paid over the years. Perhaps you realize that not only has the policy become too expensive to keep, you also don’t need it anymore. If only you could reclaim some of that money, you could use it for medical bills, long-term care, paying off debt or other expenses you’re facing as you grow older.
There’s a solution to that dilemma: Before your policy lapses, you can sell it for cash via a life settlement. Harbor Life works every day to help customers like you make life settlements and get the most cash quickly from selling their life insurance policies. Contact us to get started with a FREE cash estimate on the value of your policy.