- Our take
- What is permanent life insurance?
- How much does permanent life insurance cost?
- How does permanent life insurance work?
- Term vs. permanent life insurance
- Types of permanent life insurance
- Life insurance cash value
- How to convert from a term life policy to a permanent life plan
- How to buy permanent life insurance
Our take
Many permanent life insurance policies, such as whole and universal life insurance, offer lifelong coverage with benefits that can be accessed while you’re alive. It's ideal for those who want a guaranteed death benefit and the added advantage of cash value accumulation. However, it's generally more expensive than term life insurance and not everyone needs the lifelong coverage. Additionally, the cash value may not benefit those who haven't maxed out other investments. Speak to an agent or financial advisor before getting a permanent life insurance to ensure you get a life insurance policy that meets your needs.
What is permanent life insurance?
A permanent life insurance policy covers you throughout your life as long as you pay the premiums. The most common types of permanent life insurance are whole life and universal life.
Permanent life insurance includes a death benefit and a cash accumulation account, which can be accessed during your lifetime. You choose the death benefit, but the amount in the cash account will vary.
How much does permanent life insurance cost?
The cost of permanent life insurance depends on several factors, including your gender, health, age, the type of policy and the coverage amount. Here’s a sample premium comparison chart from AAA for a whole life insurance policy.
These premiums are for $30,000 in whole life coverage at standard, non-nicotine rates.
| Age | Male | Female |
|---|---|---|
| 35 | $47.42 | $43.55 |
| 45 | $64.34 | $59.38 |
| 55 | $91.43 | $81.35 |
| 65 | $141.68 | $121.96 |
As you can see, whole life insurance premiums are higher if you buy a policy when you’re older. That’s because an insurance company bases premiums on life expectancy. Regardless of the type of life insurance policy you choose, you will pay more the older you are when you apply.
A 20-year-old will likely pay premiums for many more years than a 50-year-old before the insurance company has to pay a claim. In addition, men usually pay more for life insurance because men have a shorter life expectancy than women.
The higher the death benefit amount, the more you can expect the premiums to be, regardless of other factors. Because a permanent life policy lasts your entire life, the insurance company expects to pay the death benefit at some point, which means higher premiums.
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Based on the information you provided, you need a combination of term and life insurance policies.
How does permanent life insurance work?
Permanent life insurance is simple: you pay the premium and when you die, the insurance company pays the death benefit. Permanent life insurance lasts through your entire life as long as the premiums are paid, unlike term life.
Also unlike term life, permanent plans include a cash value component. A portion of what you pay goes into a cash accumulation account, where it gains interest. You can access this account during your lifetime either as a loan or as a surrender. This cash value, however, is not part of the death benefits, and returns to the insurance company if not used during your lifetime.
Term vs. permanent life insurance
There are two types of life insurance: term life insurance and permanent life insurance. Both policies provide a guaranteed death benefit. However, these policies differ in several ways.
Term life insurance provides temporary coverage, usually for 10 to 30 years. If you die during the term, your beneficiary receives the payout. If you outlive the term, your coverage typically expires (unless the policy is converted). On the other hand, permanent life insurance covers you for your lifetime and pays out whenever you die.
Another difference between term vs. permanent life insurance is that permanent policies generate cash value. With each premium payment, a portion of the money goes toward cash value, like a savings account. You can borrow or withdraw the money like a loan, and the funds can be used for any purpose.
In addition, term life insurance is cheaper than permanent life insurance from the outset, but term premiums may increase with age. However, when choosing between term and permanent life insurance, it’s important to consider your family's needs, not just the cost.
Most people think first and foremost about price and affordability when deciding between term life and permanent life policies, but there are more important considerations like understandability, suitability and sustainability. Do you understand the products you are considering? Are they the right fit for you? And will you be able to continue to pay for them or fund them?" said Spencer Barclay, founder and CEO at Saveology.
In the table below, you can see how the two types of life insurance compare:
| Term life | Permanent life | |
|---|---|---|
| Length of time | Limited: Commonly 5 to 30 years | Lasts your whole life |
| Premiums | Often less expensive than permanent life | Usually more expensive |
| Cash value | No cash value | Accumulates cash value that you can access while you're alive if needed |
| Conversion option | Term life policies can often be converted to a permanent life policy when the term ends | You can't convert from permanent life to term life |
Types of permanent life insurance
There are multiple types of permanent life insurance. The main differences are the cost and how the policy’s cash value grows. Here are the most common forms of permanent coverage:
- Whole life insurance provides a guaranteed benefit, a guaranteed earnings rate on your cash value and a consistent premium. Some whole life policies can also earn dividends based on the company’s financial performance. Whole life is the most basic permanent life insurance and has little risk.
- Universal life insurance is a flexible plan that lets you adjust the premiums using cash value. Many policies also allow you to change the death benefit. However, one risk with universal life is your policy could lapse if you don't have enough cash value or if interest rates drop. Newer types of universal life insurance often have guarantees to ensure that this doesn't happen.
- Variable life insurance ties your policy to an investment. The performance of the investment directly impacts your death benefit. Variable life is one of the riskiest forms of permanent life insurance.
- Variable universal life insurance is a hybrid of variable life and universal life insurance. It allows you to adjust your premiums and death benefit and invest your policy premiums. Variable universal life insurance provides flexibility, but it can also be risky, depending on the investments you choose.
- Final expense insurance provides a small amount of coverage for people who want to help their loved ones pay for their end-of-life expenses. Most final expense insurance policies are available without a medical exam and provide up to $50,000 in coverage. The premiums are fixed and the death benefit is guaranteed. In most cases, these policies also build cash value.
Life insurance cash value
One perk of permanent life insurance is that it can double as a savings account by generating cash value. With each premium payment, some money goes toward cash value, which grows based on a predetermined interest rate. You can borrow or withdraw the money while still living, but there are conditions.
For instance, imagine that you need major surgery and need to pay a medical bill. You could withdraw some of your cash value to pay it off.
However, be aware of the limitations around borrowing or withdrawing cash value. When you borrow the money, the insurance company essentially gives you a loan. You must pay the money back with interest.
Another thing to know about cash value is that your beneficiary usually does not get to keep the money after you pass away. If you don’t use the cash value from your policy while living, the money goes back to the insurance company.
How to convert from a term life policy to a permanent life plan
Many term life policies can be converted to permanent ones when the initial term ends. Plus, you don’t need to take another medical exam, even if your health has changed since purchasing the term life policy.
Depending on your life insurance company, you may have to start the conversion process before your initial term ends or before you reach a certain age. For instance, you might have to switch to permanent life insurance before you turn 65; otherwise, you lose the ability to convert the policy.
Converting a term life policy can be a good way to keep your coverage in force and lock in coverage for the rest of your life. However, remember that permanent life insurance premiums are based on age. So, you’ll pay higher premiums if you convert the policy when you’re 65 than if you convert the policy at 45.
Find out more about why converting to a permanent life insurance plan may work for you.
How to buy permanent life insurance
To buy permanent life insurance, shop around and get quotes from various insurers. The cost of permanent life insurance differs for each individual, but insurance companies also have different rates.
Unlike term life insurance, many permanent life insurance policies can’t be purchased online. Depending on the insurance company, you may need to contact an agent to get a quote and apply for a policy.
Some policies require a medical exam. This usually involves a general physical and blood draw.
There’s usually a few weeks to a month waiting while the underwriter reviews your application and your exam results. Your coverage takes effect once you’re approved and you pay the first premium.
