Permanent life insurance is a form of life insurance that lasts for the entire life of the insured person. It’s distinct from the more typical term life insurance, the sort an individual purchases for a fixed term, typically for one year, five years, or sometimes in terms as long as 30 years. In term life insurance, the consumer pays a premium and the payout is paid in the event that the insured passes away during that term. Permanent life insurance varies from term life insurance in a few key ways.
First, since a permanent life insurance policy lasts for the insured person’s entire life, a payout is guaranteed. Your permanent life insurance premiums are invested, so the policy accrues cash value. Term policies on the other hand, accrue no value and pay nothing unless the insured person passes away during the policy’s fixed term.
Next, premiums for the two forms of policy differ sharply. Buy a permanent policy today, and you’re guaranteed to pay a much higher premium than you would for a term policy. However, the premiums for that term policy tend to rise as the insured person ages. Those extra dollars paid in the early years of a permanent policy get invested and grow. That growth is tax-deferred if the policy is cashed in during the insured persons lifetime. Proceeds are usually tax-free to the beneficiary upon the insured person’s death.
So, which insurance is right for you?
The answer depends on what you need your insurance policy for, and how long you plan to keep it. If you only need a certain amount of coverage for a short amount of time, then chances are that a term policy will best suit your needs. For example, let’s say that you are a worker married to a working spouse, any children you have are now financially independent, and that you and your spouse have five years of mortgage payments remaining. After discussing it, the two of you agree that neither of you would be able to afford your mortgage payments on only one income, should one of you tragically pass away before you’ve finished paying for your home. A short-term policy in the amount of your remaining mortgage debt is probably best for you.
If, on the other hand, there are expenses you will leave behind, then a permanent policy could be the wiser choice. These kinds of expenses include debts owed that will survive you, taxes that will be owed against your estate, etc. Should a permanent policy be right for you, there a few types to consider:
- Traditional Whole Life Policies are the simplest, and offer the most guarantees. The premium is guaranteed, as are certain death benefits and cash values.
- Universal Life Policies have varying premiums (with a guaranteed maximum) and minimum guaranteed cash values and death benefits. Instead of the dividends paid to traditional whole life policyholders, universal policies accrue interest at a credited rate determined each year.
- Variable Life Policies offer the fewest guarantees, and the highest possibility for increasing in cash value.
Don’t feel daunted by the berth of available permanent life insurance policies. They vary so widely because of the vast needs of consumers. If you’re unsure what type of policy is best for you, speak to an insurance professional. Better yet, speak to multiple insurance professionals. Do your homework, shop around online for life insurance and make an informed decision.
Published or updated September 26, 2010.
{ 4 comments… read them below or add one }
I would tend to disagree with this advice on permanent life insurance. Most often, the true return rates on these policies are miserable at best. Most consumer organizations point folks toward fixed rate term insurance. We have two of these policies, the premium rate can’t increase one penny over the 20 year life of the policy. Some of these permanent policies don’t even pay out the accrued amount if the policy holder passes away, they only pay the face amount of the insurance. Bottom line – any life insurance policy that is not fixed rate term in a gamble. You will be much better off down the road to pay off your debt and build an emergency fund than to try to use one of these fancy, high agent commission non-term policies.
Thanks Dave, for your unoriginal (ie, regurgitated) analysis. The only way one determines that “the true return rates on these policies are miserable” is by overlooking that the expense charges which are normally blamed are reasonable costs of insurance and policy guarantees. The raw rates of return are identical to those of the investment vehicles within them. Also ignored are the tremendous tax advantages available only with life insurance cash values.
You are correct that most term policies today are level term with a guaranteed premium, but the author was obviously referring to the often prohibitively higher premiums that result from renewing a policy after the end of the initial term. Bottom line: There is such a thing as a permanent need for life insurance, though that need does not apply to everyone. If the life insurance need exceeds twenty years, that need is almost always met more cost effectively using permanent insurance.
Rob Drury
Executive Director,
Association of Christian Financial Advisors
If you are deciding whether to get a whole life insurance or term insurance, you should look into your situation… assess your needs. Whatever is your option, look at insurance as something that you will leave behind to your family
Choosing between Term Life Insurance and Permanent Life Insurance is often a heated and emotional discussion. There is no doubt that the phrase “buy term and invest the rest” makes sense for many.
Unfortunately, the reality is that most do not actually “invest the rest” which leaves them with a term policy that either 1) gets very expensive at the end of their term or 2) they just drop the policy altogether and go without life insurance in their later years. (Of course, this is when they are most likely to die)
Now I can make a case for going either way, but what it all comes down to is personal choice and freedom. Saying that Term life Insurance is “The” right way for most people to buy life insurance is like saying that everyone should drive the same kind of car. After all, it will probably get them from point a to point b, until it doesn’t any more. Then you have to go out and buy a different car.
The key is in actually talking with a knowledgeable, licensed professional who is able to understand not just what your “needs” for life insurance are but take into consideration your “Wants” as well. Life insurance calculators and online quoting engines have a hard time helping you determine what your Wants actually are.
James
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California Term Life Insurance Quote