Permanent Life Insurance Options

Life insurance is intended to provide financial security to your loved ones in the event that you die. If you're looking for life insurance and decide you need coverage for the rest of your life, permanent life insurance provides lifelong protection as well as a cash value component.

While permanent life insurance is more expensive and complicated than term life insurance, it can make sense in some situations. If you're thinking about purchasing a permanent life insurance policy, here's what you should know before making a final decision.

Who Needs Permanent Life Insurance?

People buy permanent life insurance for a variety of reasons, including:

  • The need for lifelong life insurance protection due to the financial reliance on you.
  • A desire to establish a trust for heirs.
  • A desire to leave a monetary legacy to heirs.
  • The decision to capitalize on a policy's cash value or investment component.

Permanent life insurance policies can provide lifelong coverage as well as the opportunity to accumulate cash value on a tax-deferred basis. Because of these characteristics, permanent life insurance is more expensive than term life insurance.

If you decide to cancel or surrender the policy at any time, you can receive the cash value of the account but may be subject to a surrender charge, depending on the policy terms.

Permanent life insurance policies are not appropriate for people who do not require long-term coverage. For example, if you want life insurance to cover your working years (as income replacement for your family) or the years of a mortgage or debt, term life is a better and more affordable option.

If permanent life insurance is your best bet, your policy selection will be based on the policy's flexibility, level of investment risk, and affordability.

Cash Value Within Permanent Life Insurance Policies

When you pay your premiums on a permanent life insurance policy, a portion of the money goes into a cash value account. Once you've accumulated enough cash in the account, you can borrow against it or withdraw it. However, if you've depleted your cash value and there isn't enough money in the policy to cover policy charges, you may have to pay more premiums to keep the policy from expiring.

If you borrowed money from the cash value and haven't paid it back, the loan amount and interest will be deducted from your death benefit if you die.

You may be able to walk away with some cash value if you decide you no longer want a permanent policy. If you cancel the policy, the insurer will refund the cash value less any surrender charges.

Whole Life Insurance

Your premiums, rate of return on cash value, and death benefit are all fixed and guaranteed with a whole life insurance policy. Over time, the cash value component will rise. You have the option of withdrawing funds or borrowing against the cash value.

There are several reasons why people choose whole life insurance over other types of permanent insurance. The first and foremost benefit is the predictability provided by the policy's guarantees.

Another advantage of a whole life policy is that you can usually earn dividends every year. Dividends allow policyholders to share in a mutual insurance company's profits. While dividends are not guaranteed, you can take them as cash, use them to pay premiums, or invest them in your cash value.

Furthermore, the cash value component of the policy's growth is tax-deferred. If you surrender the policy and take the cash value, you'll have to pay capital gains tax. You will not be taxed on the portion of your take-home pay that was deducted from your premium payments.

The death benefit to your beneficiaries, like any other life insurance policy, is tax-free.

There are some drawbacks to whole life insurance as well:

  • Whole life insurance is the most expensive option when compared to term life insurance and even other types of permanent policies.
  • The interest rate on your cash value is lower than the interest rate you could earn if you invested your money in another investment vehicle.
  • Whole life insurance policies do not provide the same level of flexibility as universal life insurance policies. You cannot change your premium payments or death benefit with a whole life insurance policy.

Universal Life Insurance

Universal life insurance (UL) policies are frequently more adaptable than whole life insurance policies. Within certain parameters, you may be able to modify your premium payments and death benefit.

The cash value gains in a universal life insurance policy will differ depending on the type of UL policy purchased:

  • Guaranteed universal life insurance will have a minimum guaranteed rate of return on cash value, such as 2%, with the potential to earn more based on insurer investments.
  • Indexed universal life insurance ties the cash value of your policy to the performance of an index, such as the S&P 500.
  • Variable universal life insurance ties your cash value to investment subaccounts that you can pick and choose from.

Your choice of UL will be determined by how much investment risk you want to take and how much control you want over subaccounts.

Universal life insurance is less expensive than whole life insurance, but it is still more expensive than term life insurance.

Furthermore, universal life insurance policies may not have fixed costs. The premium you pay is divided into three parts: the cash value account, the cost of insuring you, and policy charges and fees. However, many insurance premiums rise as you get older. If you've depleted your cash value, you may be forced to pay higher premiums to cover the charges and keep your policy in force.

Variable Life Insurance

Variable life insurance provides a death benefit as well as a cash value component that you can invest in a variety of investments such as stocks, bonds, and money market funds. The investments you choose will determine the amount of gain or loss in your cash value.

Variable life insurance is intended for those who are willing to take on additional investment risk. While you may be able to earn a higher return than with a whole life policy, you are also taking on more risk.

If your cash value performs well, you may be able to use the gains to offset some of your policy premiums.

Furthermore, the fees and expenses of a variable life insurance policy can significantly reduce the portion of your premium payments that go toward the cash value. Variable life insurance policies charge mortality and expense fees, as well as administration and investment management fees.

If you're thinking about getting variable life insurance, make sure you understand which parts of the policy are guaranteed (like cash value) and which aren't.

Burial and Final Expense Insurance

Burial or funeral insurance is a small whole life insurance policy with a death benefit typically ranging from $5,000 to $25,000. Most policies are sold without requiring a medical exam, and you cannot be denied. In general, consumers with health issues and limited financial resources purchase this type of permanent life insurance to cover their burial or funeral expenses.

Burial or final expense insurance is only intended to assist your beneficiaries in covering funeral costs and other miscellaneous expenses after you pass away. It is expensive in relation to the amount of coverage you receive.

Burial insurance is not intended to assist your family in meeting financial obligations such as college tuition, mortgage payments, or other day-to-day living expenses.

Survivorship Life Insurance

Survivorship life insurance is also known as "joint life insurance" or, more controversially, "second to die life insurance." Typically, it is a whole life insurance policy. It differs from other types of permanent life insurance policies in that it insures two people, typically a married couple. The policy pays out the death benefit to the beneficiaries after both spouses have died.

Survivorship life insurance is typically used to fund a trust or to pay estate taxes and other estate settlement expenses for beneficiaries.

Buying a Survivorship life insurance policy is typically less expensive than purchasing two separate policies on the same person. This is especially true if one of the insured individuals has a medical condition.

Furthermore, a survivorship policy is easier to qualify for than a single-person policy. Because both policyholders must die before the policy pays out the death benefit, insurers are less concerned if one applicant is deemed uninsurable due to health issues.

However, this type of policy does not work well if both spouses rely financially on one another. In addition, if you and your spouse decide to divorce, you may want to cancel the policy. If this is a concern, some insurers may allow you to "split" the policy into two separate policies.

Term Life vs. Permanent Life Insurance

There are two major distinctions between term life insurance and the various types of permanent life insurance described above:

  • Term life insurance has a predetermined end date, such as 10, 15, 20, or 30 years.
  • Term life insurance has no cash value.

Nonetheless, term life insurance is an excellent option for many families. Because life insurance needs are frequently finite, you can match the length of the term to your need for life insurance protection. Many people, for example, use term life insurance to provide income replacement for their families in the event that they are no longer alive. You can cover your working years by multiplying the number of years until retirement by the annual amount your family requires.

So, a 35-year-old man might decide to purchase term life insurance for $80,000 per year for the next 30 years.

Term life insurance is the most cost-effective type of life insurance, so you can get the most bang for your buck.

If you later realize you need permanent coverage, many term life policies have a "conversion" option that allows you to convert the policy to a permanent one. When you convert, the life insurer will inform you of your policy options. Your rate will be determined by your conversion age as well as your original health class. There will be no need for a new life insurance medical exam.

Understanding why you need life insurance to protect yourself and your loved ones is the key to determining whether term life or permanent life insurance is right for you. The two most common reasons for purchasing life insurance, according to the 2019 Life Insurance Barometer report by industry groups LIMRA and Life Happens, are to replace lost income and to pay for funeral or burial expenses. These funds can be obtained through both term and permanent life insurance.

Remember that there is no one-size-fits-all solution when weighing your options. A financial advisor can help you determine where life insurance fits into your overall financial plan, and a life insurance agent can help you find the insurers who will give you the best deal.