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Find out if permanent life insurance is worth the higher price tag.
Permanent life insurance is exactly that — permanent. It lasts your entire life and becomes a cash asset over time, but it’s expensive and not the best investment for everyone.
What is permanent life insurance?
Permanent life insurance offers lifelong coverage — as long as you keep up your premiums. It’s a life insurance policy and investment product rolled into one. It pays out a lump sum to your beneficiaries when you die, and has a savings component known as the cash value.
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How does permanent life insurance work?
When you pay your monthly or annual premium, a portion will go towards the cash value of your policy. Think of this as a tax-deferred savings account. The amount of money that goes into this account varies by policy, and it earns interest over time.
Once you build up enough cash value, you can start to take out tax-free loans against your policy, or use the funds to pay for premiums, boost the death benefit or save for retirement.
Different types of permanent life insurance plans
All of these permanent policies last your entire life and accumulate cash value. But they vary in terms of how the cash value grows:
- Whole life. The simplest permanent policy, whole life insurance earns a fixed rate of return set by your insurer.
- Universal life. With universal life insurance, the cash value is tied to a stock index, such as the S&P 500, and earns interest based on the current market rate. Since it’s subject to market conditions, the returns may fluctuate over time.
- Variable life. This policy offers the highest potential returns, but it’s risky — so it’s offered by prospectus only. When you sign up for variable life insurance, you’ll be given a portfolio of stocks, bonds and mutual funds to align with your risk tolerance. The cash value will be invested into those accounts and professionally managed by your insurer.
- Variable universal life insurance. This hybrid policy offers flexible premiums and the ability to invest your cash value in the investments of your choice. If those investments do well, there’s potential to earn significant returns. But if they perform poorly, you could face losses. Variable universal life insurance requires a hands-on approach, so it’s best suited to experienced investors with a high risk tolerance.
Features of cash value policies
| Whole life insurance | Variable life insurance | Universal life insurance | Variable universal life insurance | |
|---|---|---|---|---|
| Lifelong coverage |  | | | |
| Level premiums | | Flexible premiums | Flexible premiums | Flexible premiums |
| Guaranteed death benefit | | | | |
| Flexible death benefits and coverage amounts |  | | | |
| Guaranteed cash value | | | Protected from loss of returns, but cash value may be depleted to pay premiums | Cash value may be depleted to pay premiums |
| How cash value grows | Earns interest at a fixed rate | Invested into various subaccounts | Tied to a stock index — like the S&P 500 — and earns interest based on current market rate | Invested into various subaccounts |
| Tax-free withdrawals and loans | | | | |
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Pros and cons of permanent life insurance
Pros
- Lifelong protection. As long as you pay your premiums, you’ll have coverage your entire life — and your beneficiaries will receive a death benefit whenever you die.
- Cash asset. Permanent policies accumulate cash value over time. When you reach a certain threshold, you can access that cash and spend or invest it.
- Tax advantages. The cash value grows tax-deferred, and any loans you take out against your policy are tax-free.
- Flexible premiums. Most permanent policies allow you to adjust the amount and frequency of your premium payments.
- Collateral against a loan. If you take out a loan, your lender can guarantee the loan with the cash value of your policy.
Cons
- Expensive. Permanent policies can be six to ten times more expensive than term life.
- Risky investment. Though permanent policies build cash value, the investment options are limited with relatively low rates of return. If investing is your priority, you might be better off investing in a mutual fund, 401(k) or IRA.
- Depleting cash value. If you take out too many loans against your policy, there’s a chance you might deplete your cash vale and lose your coverage.
Is permanent life insurance right for me?
For the average person, a term life insurance policy makes the most sense. But permanent life insurance might be the best option for those with complex financial needs, such as:
- High income earners who have maxed out their 401(k), Roth IRA and other retirement accounts, and want to use their life insurance policy to build tax-deferred savings.
- High net worth individuals who want to leave a tax-free inheritance so their children can avoid paying hefty estate taxes.
- Parents with lifelong dependents, such as special needs children.
- Seniors who have outlived their term life insurance and want a lifelong solution.
- Seniors who don’t have enough savings to cover their end-of-life expenses and funeral costs.
Bottom line
Permanent policies are a two-in-one product: They offer lifelong coverage and the opportunity to invest. While the forced savings vehicle works well for some people, this type of life insurance is expensive to maintain — and it isn’t always a sound investment.
Whether you’re in the market for a permanent policy or a simpler term life insurance policy, be sure to compare providers.
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