What Is Permanent Life Insurance?
Summary: Permanent life insurance offers lifelong coverage, builds cash value, and serves as a versatile financial tool. We explore the definition of this insurance policy, its types, and how you can leverage its benefits for financial protection and wealth-building.
When planning for the future, your long-term financial stability should be top of mind. One way to achieve this is by investing in life insurance. For many, the idea of life insurance begins and ends with term policies designed to cover them for a specific period. But what happens when your needs extend beyond a temporary solution? The perfect solution here is to invest in permanent life insurance.
So, what is permanent life insurance? This guide will discuss the meaning of permanent life insurance, how it differs from term insurance, the types available, and more.
Defining permanent life insurance
Permanent life insurance provides coverage for the insured’s entire lifetime, as long as premiums are paid. This makes it a long-term financial strategy meant to provide recipients with a death benefit and to create monetary value over time.
The cash value component of permanent life insurance grows tax-deferred. This means policyholders don’t have to pay taxes on these values as they build within the policy. You can withdraw or get loans against this cash value. That makes permanent life insurance a versatile financial tool for many purposes.
Purpose of permanent life insurance
Permanent life insurance serves a dual purpose. While its primary role is to help your loved ones feel financially protected when you pass, it also acts as a savings vehicle, offering the potential for wealth accumulation over time.
Permanent life insurance can create value not just for your beneficiaries but for you as well. The policy has a cash value component that grows over time. You can access this cash value while you’re still alive to help cover significant expenses such as your children’s college tuition, fund a dream vacation, or make home improvements.
For individuals who have already maxed out their contributions to other investment accounts like 401(k)s, IRAs, or 529 plans, permanent life insurance can serve as an additional avenue for tax- deferred savings.
The combination of lifelong coverage and cash value growth makes permanent life insurance an integral part of your financial strategy.
However, it’s important to note that the premiums for permanent life insurance are typically higher than those for term life insurance. This higher cost reflects the added benefits and the guaranteed lifetime coverage. If you have the financial means to sustain these premiums, permanent life insurance can be a robust solution to help secure your family’s future and also contribute to their financial growth during their lifetime.
Permanent vs. term life insurance
A lot of people consider getting life insurance so they can help protect their family’s financial future. But when choosing life insurance, the decision often comes down to term vs. permanent life insurance. Ultimately, the final choice depends on many factors.
Term life insurance
Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years. If the policyholder passes away during this time, the death benefit is paid out to beneficiaries.
Term policies are generally more affordable, making them an attractive option for those seeking temporary coverage, such as young families or individuals with significant financial obligations
like a mortgage. However, once the term ends, the policy expires, and you receive no benefits if you outlive the policy.
Permanent life insurance
Conversely, permanent life insurance provides lifetime coverage, provided the premiums are paid. Along with a death benefit, this insurance has a tax-deferred, growing cash value element over time. This cash value may be borrowed against or withdrawn, providing financial flexibility. However, it’s important to understand the tax implications of these actions, so consider consulting with a tax professional in advance.
When you borrow against your policy, the loan is generally tax-free as long as the policy remains active. You don’t need to repay the loan immediately, but any unpaid balance, along with accrued interest, will reduce the death benefit your beneficiaries receive upon your passing. However, if the policy lapses or is surrendered with an outstanding loan, you may face taxes on any investment gains over the total premiums paid.
Withdrawals from the cash value are tax-free up to the amount of premiums you’ve paid into the policy. If you withdraw beyond that, the excess amount is considered taxable income.
While permanent life insurance may cost more than term life policies, it is suitable for people who want lifetime coverage and have the capacity to build wealth within the policy.
Note that your budget, duration of coverage required, and financial objectives will all determine which of the two policies you choose. For some, starting with term insurance and then switching to permanent life insurance may be the best course of action, particularly if their financial situation changes over time.
Types of permanent life insurance
There are four main types of permanent life insurance:
Whole life insurance
Whole life insurance offers coverage for the insured’s whole lifetime as long as premiums are paid. One key feature of whole life insurance is level premiums, meaning your monthly or annual payments remain the same throughout the life of the policy. This consistent premium structure makes long-term budgeting easier.
A key advantage of whole life insurance is the cash value component. When you pay a premium for whole life insurance, some of it goes toward this cash value that grows tax-free over time. You can then withdraw or borrow against the cash value once it becomes substantial. However, while whole life insurance offers lifetime coverage, it can be expensive.
It’s important to note that a whole life insurance policy takes away the hassle of medical underwriting (an assessment of your current health). The application process for a whole life insurance policy can be completed in minutes and does not require medical or health examinations. This is an ideal option, especially for those looking for immediate coverage or those who may have difficulty qualifying for traditional policies due to health concerns.
This guaranteed issue policy is available for individuals aged 45 to 85 and is particularly beneficial for covering final expenses, like funeral costs or outstanding debts.
Universal life insurance
Universal life insurance, also known as adjustable insurance, is another form of permanent life insurance. With a universal life insurance policy, one can change the death benefits and premiums over time. Depending on your financial status, you could either pay more or less for insurance.
When the cash value of the insurance increases or decreases in line with the interest rate the insurer sets, which varies depending on the state of the market, this insurance becomes indexed universal life insurance. Though there is normally a minimum rate, the interest rate on universal life plans is not guaranteed, unlike whole life insurance.
Through loans or withdrawals, universal life insurance plans let you access the accrued cash value much as in whole life. However, the freedom in premiums comes with a drawback: If you pay less into the insurance, your cash value may decrease, and if it runs out, your coverage can expire. You must, therefore, keep an eye on the performance of your insurance and make the required changes to your payments.
Variable life insurance
Variable life insurance allows policyholders to invest a portion of their premiums into various investment options, such as stocks, bonds, or mutual funds. This increases the policyholder’s possibilities for a cash value increase relative to more conventional forms of permanent life insurance. But you should also note that this possibility for potentially bigger gains comes with some risks — the success of the selected assets will affect the value of the cash component of the insurance.
How does the selected asset affect the cash value?
Variable life insurance offers a flexible death benefit that changes with investment performance. If your investments do well, the death benefit and cash value can grow, but if they don’t, both can decrease. Thankfully, most policies guarantee a minimum payout.
While it offers the chance for higher returns, it also comes with market risk and requires active management. Premiums are usually higher than term life insurance but tend to be lower than other permanent plans because of the investment feature.
Variable universal life insurance
Variable universal life insurance (VUL) combines the flexible premium and death benefit features of universal life insurance with the investment opportunities in variable life insurance. Like variable life insurance, VUL policies allow you to allocate your premium payments among different investment options, with the potential for higher returns based on market performance.
Note that if the chosen investments do not perform well, the cash value may decrease, and if it falls too low, the policy could lapse unless additional premiums are paid. Unlike standard universal life insurance, which typically offers a guaranteed minimum interest rate, VUL policies do not guarantee returns on investments, making it crucial for policyholders to stay engaged with their investment strategy.
Overall, this type of permanent life insurance is best suited to individuals who are comfortable with investment risk and are looking for a life insurance policy that offers both the potential for growth and the flexibility to adapt to their financial needs over time.
Permanent life insurance: the key takeaways
Permanent life insurance provides lifelong coverage and financial prosperity for your family. When making a choice, it’s important to weigh the long-term benefits of permanent life insurance against the higher premiums. Ultimately, the decision to invest in a permanent policy should align with your overall financial strategy, taking into account your future needs, risk tolerance, and the legacy you wish to leave behind.
To determine the best permanent life insurance coverage for your needs, use Mutual of Omaha’s Final Expense Estimate Calculator. This free tool can help you estimate the right amount of coverage for final expenses like funeral costs and outstanding debts.
Deciding if permanent life insurance is right for you? Get a quote today!
FAQs
Q1. How is the cash value of a permanent life insurance policy calculated?
The cash value of a permanent life insurance policy is calculated based on the premiums paid, the policy’s interest rate, and any fees or charges.
Q2. What happens if I stop paying premiums on my permanent life insurance policy?
If you stop paying premiums, the policy may lapse, meaning you lose coverage. However, some policies have a grace period or allow you to use the accumulated cash value to cover premiums temporarily.
Q3. Are the death benefits from a permanent life insurance policy taxable?
Generally, the death benefits from a permanent life insurance policy are not subject to income tax. However, if the policy is part of a taxable estate, estate taxes may apply.
Q4. Can I use the cash value of my permanent life insurance policy while I’m still alive?
Yes, you can access the cash value of your permanent life insurance policy through loans or withdrawals. However, doing so may reduce the death benefit and could have tax implications.
Disclosures:
Mutual of Omaha Investor Services, Inc. and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation.
Consult with a professional tax and/or legal advisor before taking any action that may have tax or legal consequences.
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