You may be wondering, “What is permanent life insurance?” Permanent life insurance is simply a type of life insurance that you don’t have to renew and it provides lifelong coverage. Generally, as long as you keep up on your premiums, a death benefit gets paid to your beneficiaries when you pass away. But one of the most confusing parts of permanent life insurance is all the types. So below we’ll outline the differences in life insurance by type.
- Whole Life vs. Universal Life Insurance
- Permanent Life Insurance Vs. Term Life Insurance
- Permanent Life Insurance Types: Subtypes of Universal Life Insurance
- Surrender Permanent Life Insurance Policies
Whole Life vs. Universal Life Insurance
So, what is permanent life insurance? The two main permanent life insurance types are whole life and universal life. The main differentiator is that whole life plans have a fixed premium and universal life tends to offer a flexible premium based on the type. A fixed premium simply means you pay one amount for as long as you keep the policy, whereas with a flexible premium you can adjust payments.
However, adjusting premiums can reduce the cash value or death benefit of the policy. Universal life also may allow you to adjust your coverage amount.
Both whole and universal life do allow the ability to accumulate cash value over time. You can borrow against or withdraw from that cash value. Whole life may allow loans against the policy. Both also allow you to grow cash value tax-deferred.
Most, if not all, proceeds from both whole life and universal life insurance policies such as death benefits, dividend, withdrawal or loans from the cash value account are non-taxable.
In general, whole life insurance was made for people who want a guaranteed coverage amount and guaranteed returns on cash value.
Another key differentiator is how both permanent life insurance types tend to grow cash value. Universal life often allows you to invest or tie interest to market performance, depending on the type. Cash value on a whole life plan grows on a predetermined schedule and does not accumulate interest.
|Whole Life||Universal Life|
|Cash value||Yes||Yes, except Guaranteed Universal Life|
|Interest/investment||Increases at a set schedule||Yes, varies by certain types|
|Death benefit||Fixed||Generally flexible|
|Cash deferred, tax-free||Yes||Yes|
|Access to funds while alive||Yes, tends to be loan-based||Yes, withdraw or borrow|
|Prices||Tend to be more expensive||Tend to be cheaper|
Permanent Life Insurance Vs. Term Life Insurance
Term life is focused on paying out a certain amount if you die during the term of the insurance. It runs for a certain period, usually 10, 20 or 30 years.
Another benefit of term life insurance is that the premiums tend to be lower for higher amounts of coverage. For instance, in our term life article, we listed a premium for a 40-year-old male at $212 for $250,000 in coverage, versus a little over $200 per month for indexed universal life insurance and variable universal life insurance, and just $115 per month for guaranteed universal life insurance for $150,000 in coverage.
It’s also much easier to shop for term life insurance. You can go through sites like Policy Genius or Quotacy. You don’t necessarily have to purchase it through agents or financial advisors, like permanent life insurance tends to require.
Term life is also more for people who just want to focus on the death benefit itself. While permanent life insurance tends to have more options for accessing cash while still alive and allowing you to gain cash value on the policy. People who want to use their life insurance as a financial safety net in case they become injured or ill, or want to supplement their savings, should look into permanent life insurance.
Permanent Life Insurance Types: Subtypes of Universal Life Insurance
To further understand what is permanent life insurance, there are also three main subtypes of universal life (UL) insurance:
- Indexed UL insurance: Allows you to grow the cash value on your policy through linking your interest to the performance of certain markets, like the S&P 500
- Variable UL insurance: Allows you to use the cash value of your account to directly invest in stocks and bonds
- Guaranteed UL insurance: Generally creates fixed premiums and a fixed death benefit, very little to no cash value
Below are how each product generally works, though it could vary by company. Be sure to talk to an agent about your options with individual companies.
|Indexed UL insurance||Variable UL insurance||Guaranteed UL insurance|
|Interest/investment||Yes, tied to markets||Yes, direct investment||No|
|Premiums||Flexible||Flexible||Generally fixed, could change if money is pulled from policy|
|Death benefit||Flexible||Flexible||Fixed, unless money is pulled from policy|
|Cash deferred, tax-free||Cash value tax-deferred, Death benefit tax-free||Cash value tax-deferred, Death benefit tax-free||Death benefit tax-free|
|Access to funds while alive||Yes||Yes||Yes, often through riders|
Surrender Permanent Life Insurance Policies
Unlike term life insurance policies, permanent life insurance policies can be surrendered, which means cancellation, and policy holders still receive some payout. When you cancel your permanent life insurance policies for any reason, while your beneficiaries will not receive the face value (or coverage amount) of the policy when you pass away, you can keep the money from the cash value account. However, insurance companies will charge you a cancellation fee and that will be deducted from your cash value account. This fee is also called surrender charges.
After surrendering or cancelling the policy, you will get paid with a lump sum amount, also called surrender value. Surrender value is usually calculated taken into account the surrender charges, any administrative costs, and outstanding loans taken from the account.
You have many different options for permanent life insurance types. It can seem confusing, but these options were all created so that you can choose the type of permanent life insurance that works for you.