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The inherent flaw most people find with term life insurance is that it expires. Permanent life insurance, however, doesn’t face this problem — as long as payments continue to be made. Where permanent life insurance falls down is its higher costs and potential for lost coverage and value.
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What is permanent life insurance?
Permanent life insurance provides long-term insurance coverage that continues as long as premiums are paid. It typically has a savings component — also known as cash value — that can be borrowed against. For this reason, premium rates for permanent life insurance policies are much higher compared to term life insurance.
Different types of permanent life insurance plans
- Whole life. This type of permanent life insurance plan is designed to provide life coverage and an investment component for the policyholder. Whole life provides a guaranteed amount of coverage upon passing with a level premium, so the rates you pay won’t increase over time. A portion of your premium is used to fund your benefit payout, while the rest goes to increasing the cash value of your policy.
- Variable life insurance. This policy type includes a savings component that you can use to invest in sub-accounts. The cash value and benefit payout can both be influenced by the financing options you choose and the performance of your investment options.
- Universal life insurance. You’ll find flexible premiums you can adjust to meet your financial situation with this plan type. For example, you can opt for lower payments if you have a tight budget and pay higher premiums when you can afford it.It’s a more affordable type of permanent life insurance policy compared to whole life insurance, providing a cash value in the form of savings and a death benefit.
- Variable universal life insurance. Once your cash value earns enough value, you can start to make partial or full premium payments using it under a variable universal life policy. Outside of your cash value earning value through a savings portion, you can also choose to invest it in sub-accounts like you would with a standard variable plan.
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Benefits of permanent life insurance
Some may prefer permanent life insurance plans to other types of coverage for the following reasons:
- Lifelong protection. Permanent life insurance provides coverage against risk for your entire life. At the end of your policy, either your cash value or death benefit will be paid by the insurance provider to your beneficiaries.
- Cash value as equity. Most permanent plans build cash value over the life of the policy that can be accessed and spent or invested.
- Collateral against a loan. The cash value can also be used as guarantee if you take out a loan.
- Borrow from the cash value. A loan can be taken out once the cash value reaches a certain point. Note that if the interest and amount owed goes over the value of your policy it can be canceled and you could lose coverage.
- Flexible premiums. Permanent life insurance policies may be more flexible than term life. For example, you’re able to adjust your payment terms, coverage and invest portions of permanent plans.
Is permanent life insurance right for me?
Whether permanent life insurance is the best option for you — or even a good option — depends on a number of factors. Your current financial portfolio and insurance, whether you’re looking to supplement another plan or get complete coverage, if you want to borrow against your policy and how you want to invest and save money all play a part in if permanent life insurance is right for you.
A financial adviser can assist you with evaluating your current portfolio if you’re still unsure if permanent life insurance fits well into your overall financial plan.
Bottom line
Permanent life insurance can offer a plan that lasts with you your entire life and gives you flexible payment and coverage options. It’s not necessarily as affordable as term life insurance though, and you may find more beneficial investment tools elsewhere.
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