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Permanent life insurance: What you need to know

By Posted : December 4, 2019

Life insurance offers peace of mind that your family will be cared for after you die. Permanent life insurance, such as whole life, guarantees that they’ll be taken care of if the unthinkable happens.

There are many reasons that people buy life insurance. They purchase coverage to cover final expenses, such as funeral and burial. They buy it to replace a wage earner’s income. They get coverage to provide money for a child’s education.

Imagine you were to die tomorrow. Could your family afford a funeral? Would your spouse be able to pay the mortgage? How much do you owe on credit cards? What would it mean for your child’s future education?

Permanent life insurance is there to help protect your loved ones when you die. Ultimately, it’s up to the beneficiaries how to spend the death benefit. Make sure to include specific information in your will if you want to make sure the money is spent in a specific way, such as your child’s education.

On this page, we’ll dive deeper into permanent life insurance and when it’s the right choice.


Permanent life vs. term life

There are two overarching types of health insurance: permanent life and term life.

Term life is the more common type of policy. However, in recent years, more people have been buying new permanent life insurance policies than term life.

One major difference between the two types of policies is that permanent is for life. Term is for a specific number of years.

You can buy a term life policy for 10, 20, 25 or 30 years. Term life is usually cheaper and pays out more. That’s because a term life is considered a lower risk to the insurance company.

As long you pay your premium, the insurer must pay out your permanent life insurance death benefit. On the other hand, there’s no guarantee that an insurer will have to pay out on a term life policy. There’s a good change you’ll outlive your term life policy.

Here’s how the two types of insurance compare:

Term lifePermanent life
Length of timeTerm life is for a limited time -- often 10, 15, 20 or 30 yearsLasts your whole life
PremiumsOften less expensive than permanent lifeUsually more expensive
Cash valueNo cash valueAccumulates cash value so you can tap into the policy while you're alive if needed
Conversion optionTerm life policies often let policyholders convert to permanent lifeYou can't convert from permanent life to term life

Which one makes sense for you depends on your situation. Find out more about the differences.

Now, let’s take a look the multiple permanent life insurance options.


Types of permanent life insurance

Permanent life insurance is a wise decision if you’re looking for a policy that will definitely be there when you die. A term life policy can end while you’re still alive. That leaves little comfort to your loved ones.

Here’s when it makes sense to buy a permanent life policy:

  • You want to make sure you don’t outlive your policy.
  • You want a policy that builds cash value.
  • You want to be assured that your mortgage and children’s education are covered.
  • You don’t mind paying a little more to make sure that your insurer pays the death benefit.

There are multiple types of permanent life insurance. The differences include how much you pay and the policy’s cash value.

Here are four types of permanent life insurance policies:

  • Whole life insurance is a predictable policy. It provides a guaranteed benefit, a guaranteed earnings rate on your cash value and a consistent premium. You can also earn dividends based on the company’s performance. Whole life is the most basic kind of permanent life insurance.
  • Universal life insurance is a flexible option that lets you vary premiums. After the first premium, you can usually make payments at any time. So, you pay more if you have extra money. You can skip it or pay less if you can't afford to make a payment. Cash value is often the same as whole life insurance. One issue with universal life is your policy could lapse if you don't make enough payments or the company doesn’t perform as expected. Newer types of universal life policies offer guarantees that this doesn't happen. Universal life can be one of the cheapest forms of permanent life insurance.
  • Variable life insurance allows you to invest your policy premiums. If the investments perform poorly, the death benefit and cash value will decrease. On the other hand, if the investments perform well, the death benefit and cash value can significantly exceed those of a whole life policy. Variable life is one of the riskiest forms of permanent insurance. However, its rewards can be great.
  • Variable universal life insurance is a hybrid of variable and universal life insurance. It allows you to vary your payments, invest your policy premiums and vary your coverage amount. Variable universal life insurance is the most flexible type of permanent life insurance. It can be either risky or predictable depending on how you use it.

The type of permanent life insurance that's best for you often depends on what kind of flexibility and risk you want. A whole life policy is excellent for someone who wants a life insurance plan that will gain value but won’t take much effort. If you want a more proactive life insurance experience, one of the other three options could be right for you.


Cash value

One perk of permanent life insurance is that it can double as a savings account. Cash value lets you tap into the death benefit while you’re still alive.

The insurance company takes some of your premium and puts it into cash value. Cash value grows during the length of the policy. You’re then able to borrow from it.

One way to take advantage of cash value is to tap into it during retirement years if you have an unexpected one-time bill. For instance, let’s say you need work done on your house, but you don’t have any other way to pay for it.

Cash value is a nice perk, but don’t treat it as a retirement account. Here’s why:

  • You can make more money through a 401(k) or IRA.
  • Any money you take from your policy comes out of your death benefit.
  • Tapping into cash value often comes with a penalty.

Use caution when deciding whether to tap into your policy’s cash value.


Life insurance riders

Permanent life insurance policies often have riders. These are policy extras. Riders improve your policy but come with an added price.

Here are six common types of permanent life insurance riders:

  • Accelerated death benefit -- Let’s you collect a portion of your death benefit if you become terminally ill.
  • Accidental death benefit -- Provides a higher death benefit if you die as the result of an accident.
  • Critical illness rider -- Offers money if you’re diagnosed with a critical illness.
  • Guaranteed insurability rider -- Provides a policy without a medical exam.
  • Long-term care rider -- Gives money from your death benefit for care.
  • Waiver of premium rider -- Let’s you skip your premium if you become disabled.

    These riders may sound like a great addition, but remember that there’s often an added price. If you’re interested in any of these, get quotes from multiple insurance companies to see if you can get a rider that fits your budget.


    How to convert from term life to permanent life plan

    Many term life policies allow you to convert to a permanent life insurance policy. This could be a wise choice as your term life policy nears its end.

    You’re able to change the entire policy or a portion. Policies may require you to convert before your policy ends or before you reach a certain age. For instance, you might have to switch to permanent life before you turn 65.

    Permanent life insurance premiums are based on age. So, you’ll pay higher premiums if you covert when you’re 65 than if you changed the policy earlier.

    Permanent life insurance costs more than term life generally. So, you might want a term life policy when you’re young. However, you’ll likely build income as you age and a permanent life policy might make more sense at that time.

    Depending on your policy, you could switch to a permanent life policy without a medical exam. This could mean lower premiums, especially if you have health problems.

    Find out more about why converting to a permanent life insurance plan may work for you.


    How to choose the right amount of coverage

    A common question about life insurance is: How much coverage do I need?

    One way to get an estimate is to add up the following:

    • Funeral costs (the average can cost more than $8,000)
    • Mortgage
    • Other debts
    • Children’s education
    • Income replacement 

    Figure out how much you still owe on your debts, what your spouse will need to keep the house and live comfortably, as well as how much your child may need for college.

    Adding up those costs will give you an idea how much you need. Find out more about choosing the right amount of coverage.


    How much does permanent life cost?

    Life insurance policies vary depending on your health, age, type of policy, and coverage amount. Here’s a sample premium comparison chart from AAA of Southern California.

    Whole life insurance - Monthly rates (Standard Non-Nicotine)
    $25,000 coverage $50,000 coverage


























    As you can see, the premiums are higher if you buy a policy when you’re older. That’s because an insurance company bases premiums on risk.

    An insurer won’t likely have to pay a death benefit on a 20-year-old before a 50-year-old. Plus, a 20-year-old pays 30 more years of premiums than a 50-year-old. Hence, covering a 50-year-old costs more money. That’s also why it costs more for a man’s coverage. Men have shorter life expectancy than women, so insurers charge more for premiums.


    How to shop for permanent life insurance

    Similar to other insurance, make sure to shop around when deciding on a permanent life insurance plan. Get life insurance quotes from multiple companies for similar policies.

    For instance, if you want an accelerated death benefit rider in your plan, request quotes for policies with those riders.

    When shopping around, check each insurer’s financial ratings. You can find out this information as well as review on Insure’s Best Life Insurance Companies.

    Once you’re comfortable with the company, you can choose a permanent life insurance that will offer you peace of mind.