Permanent Life Insurance

Permanent Life Insurance

Key takeaways
* Permanent life insurance provides lifetime coverage and typically includes a cash-value component that grows tax-deferred.
* Whole life and universal life are the two primary forms; other variations include variable and indexed policies.
* Cash value can be borrowed against or withdrawn, but loans/withdrawals reduce the death benefit and may create tax consequences if the policy lapses.
* Premiums for permanent policies are substantially higher than for term life insurance.

What is permanent life insurance?

Permanent life insurance is coverage that lasts for the insured’s entire life, provided premiums are paid. Unlike term insurance (which expires after a set period), permanent policies combine a guaranteed death benefit with a savings (cash-value) component that accumulates tax-deferred.

How it works

• Premiums pay for the death benefit and fund the policy’s cash value.
• Cash value grows on a tax-deferred basis; withdrawals up to the cost basis (generally the total premiums paid) are often tax-free, though specific rules apply.
• Policyholders can borrow against the cash value; loans accrue interest and reduce the death benefit until repaid. If loan plus unpaid interest exceeds cash value, the policy can lapse.
• Surrendering a policy lets you receive the cash surrender value but may trigger surrender charges and taxes.

Main types of permanent life insurance

• Whole life: Provides guaranteed cash-value growth and fixed premiums; offers stability and predictable accumulation.
• Universal life: Combines a death benefit with a cash account and offers flexible premium payments and adjustable death benefits; cash growth depends on credited interest rates.
• Variable life and Variable Universal Life (VUL): Allow you to invest the cash value in subaccounts (similar to mutual funds). Potential for higher returns — and higher risk — since cash value and death benefit can fluctuate with investment performance.
• Indexed universal life: Cash value growth is tied to a market index (with caps/floors), blending some upside potential with downside protection.

Permanent life vs. term life

• Coverage length: Permanent = lifelong; Term = set period (e.g., 10, 20, 30 years).
• Cost: Permanent policies have much higher premiums because of the lifelong guarantee and cash-value feature.
• Purpose: Term is often used for temporary needs (income replacement while children are dependents, mortgage protection). Permanent can serve ongoing dependents, estate planning, or as a tax-advantaged savings vehicle.
• Conversion: Many term policies include a conversion option to convert to permanent coverage—often without new medical underwriting—useful if health deteriorates.

Advantages

• Lifetime coverage as long as premiums are paid.
• Builds cash value that grows tax-deferred.
• Ability to borrow against or withdraw cash value for expenses, education, or emergencies.
• Can be used in estate planning to provide liquidity for taxes, debts, or inheritance.

Disadvantages

• Substantially higher premiums than term insurance.
• Loans and withdrawals reduce the death benefit and can cause a lapse if not managed.
• Surrender fees and tax liabilities can apply if you cash out early.
• Complexity: some policies (especially variable or indexed) carry investment risk and fees.

Frequently asked questions

What happens if I take a loan against the policy?
* Loans reduce the available cash value and the death benefit until repaid. Interest accrues; if outstanding loan and interest exceed cash value, the policy can lapse.

Can I cash out permanent life insurance?
* Yes. You can withdraw cash value, take loans, or surrender the policy for its cash surrender value. Surrender may trigger fees and taxable income.

How long does permanent life insurance last?
* It lasts for your lifetime as long as you continue to pay required premiums and the policy does not lapse.

Which is better: term or permanent life insurance?
* Neither is universally “better.” Choose term if you need affordable, temporary protection. Choose permanent if you want lifelong coverage and a cash-value component and can afford higher premiums.

Bottom line

Permanent life insurance provides guaranteed lifetime protection plus a cash-value component that grows tax-deferred and can be accessed during your lifetime. It is more expensive and often more complex than term insurance, so it is best suited for those who need lifelong coverage, estate-planning tools, or a tax-advantaged accumulation vehicle and who can comfortably afford the higher premiums.