What is Permanent Life Insurance? – What You Need to Know

Permanent life insurance is a type of life insurance policy that provides coverage for the insured’s entire life, as long as required premiums are paid.

Permanent life insurance provides a death benefit that is guaranteed to be paid out to the beneficiary(ies) named in the policy upon the death of the insured.  Unlike term insurance, which only provides temporary coverage for a specified term of years, permanent insurance is lifetime coverage.

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There are a few different types of permanent life insurance policies.  The most common type of permanent insurance is whole life, or ordinary, insurance.  Universal and variable life policies are also considered permanent plans.

Initially, permanent life insurance policies are more expensive than term life insurance policies.  This is because the coverage is permanent and will be extending protection for the insured person’s entire lifetime rather than providing temporary protection for a specified term of years.

Permanent policies also have a cash value, or cash component for universal and variable products, that grows over time and can be accessed by the policy owner while the insured is alive.  Cash value in whole life products is guaranteed to grow year by year, eventually equaling the death benefit of the policy at maturity.  Because of this guaranteed cash value growth, whole life insurance policies are the least expensive type of policy in the long run.  

Universal and variable life policies are the most expensive types of permanent life insurance because of their guaranteed lapse dates (more on this later).

The major advantage of permanent life insurance is that it provides lifelong coverage which can be beneficial for individuals who have dependents or heirs who need, or require, financial support.  Additionally, the cash value of a permanent life insurance policy can be used to supplement retirement income, pay for college tuition, and cover normal or unexpected expenses.  Although term insurance can provide relatively inexpensive short-term coverage for these needs, term insurance cannot provide cost-effective long-term coverage.  Therefore, the valuable lifetime protection and cash value development must be obtained through permanent life insurance.

There is a place for both term and permanent types of life insurance.  It is important to work with an agent who will help you evaluate your current and future needs, in addition to your budget, so that you can get the policy, or combination of policies, that will work best for you.

As with anything in life, there are both pros and cons to permanent life insurance.  Listed here are several things to consider when examining permanent life insurance policies:

Benefits:

1. Lifelong Coverage:  Permanent life insurance provides coverage for the lifetime of the insured person.  This is beneficial for individuals who want to guarantee financial provision for their loved ones.
2. Cash Value:  Permanent whole life insurance policies have a cash value that grows over time.  This cash value can be accessed by the policy owner, and there are no restrictions on what the cash value can be used for.  Many people use cash value to supplement retirement income, pay for college tuition and cover normal or unexpected expenses.
3. Tax Benefits:  The cash value of a permanent life insurance policy grows on a tax-deferred basis.  This means that the policy owner does not have to pay taxes on the growth until they withdraw the funds.  Additionally, the death benefit is typically paid out to the beneficiary(ies) tax-free.
4. Estate Planning:  Permanent life insurance can be used as a tool for estate planning, as the death benefit can be used to pay estate taxes or provide an inheritance to heirs.
5. Investment Opportunities:  The cash value of a permanent whole life insurance policy can be used to take advantage of various investment opportunities while maintaining guaranteed growth and a death benefit for loved ones.

Potential Negatives:

1. Higher Cost:  Initially, permanent life insurance policies are more expensive than term life insurance policies.  However, due to cash value accumulation, whole life insurance policies are the least expensive type of insurance in the long run.  Universal and variable insurance policies are expensive products to own and maintain due to poor guarantees.
2. Complexity:  Permanent life insurance policies are more complex than term life insurance policies.  Time should be allotted to understand the type of product and the various pros and cons before purchase.  Additionally, universal, and variable products have fees and restrictions associated with accessing the cash value component.
3. Guaranteed Lapse Date:  This applies to universal and variable life policies only.  Every universal and variable policy has a year where the policy is guaranteed to lapse, thereby terminating coverage.  The hope with these products is that the non-guaranteed returns will perform better thereby extending the length of coverage. However, this is at best, just a hope, not a guarantee.  If lifetime protection is desired, policyholders will want to be aware of the guaranteed lapse date associated with universal and variable products when determining the type of coverage that will best fit their needs.

All permanent products have a cash value, or cash component, that can be accessed via policy loan or withdrawal.  When money is accessed via a policy loan, the insurance company provides an interest-only loan.  Interest is charged on the outstanding loan balance and is due each year at the policy’s anniversary date.  Some policies have a fixed loan interest rate which is guaranteed never to increase, other policies have a variable loan interest rate.  Variable loan interest rates are controlled by regulations so that exorbitant amounts of interest cannot be charged.  In times of low-interest rates, policy loans are usually slightly higher than the national average loan rate, but in times of high-interest rates, policy loans are usually well below the national average.   This is an important consideration for many when purchasing a permanent life insurance policy.

All permanent policies also have a surrender value.  At any time, a policyholder can choose to surrender their permanent policy thereby terminating coverage.  When a policy is surrendered any surrender value is paid to the policy owner.  Whole life policies do not have a surrender fee and the surrender value is always slightly higher than the available loan value.  

With universal and variable policies, the insurance company builds in a fee to compensate for any early surrender.  This is called a surrender fee and it is usually effective for the first 10 years of a universal or variable policy.  If a policyholder surrenders a universal or variable life insurance policy during this time period, the insurance company will pay the policyholder the surrender value (account value) minus the surrender fee.  Because of surrender fees, when a variable or universal life policy is surrendered, the policyholder may receive little or no monetary value.

Whenever a permanent policy is surrendered, there could be tax implications.  Because cash value grows tax-deferred in permanent policies, taxes will be assessed on any amount that exceeds the cost basis (total premiums paid) for the policy.

Overall, permanent life insurance provides a combination of guaranteed protection, growth, and accessible capital, making it a valuable tool for individuals who want to build wealth while protecting and providing for their loved ones.  For those who want to ensure lifelong coverage, guaranteed growth, and access to cash value without additional fees or restrictions, whole life insurance is the preferred product of choice.

To see what a well-designed whole life insurance policy with high cash value can look like with your numbers, contact McFie Insuranceat 702-660-7000 or schedule a time for us to call you here.

by Gracine McFie

There are many ways to access information about finances, but it can be hard to determine which sources are trustworthy. I like to put information together in an accurate, straightforward, easy to understand manner so people can make good financial decisions based on the information provided without having to waste time wondering if the source is reliable.