Life insurance is a valuable protection that can help family members pay their bills in the event of the policyholder's untimely death, but there are many types of insurance policies to choose from. One of the first major decisions is whether to buy term or permanent life insurance. In this article, we'll take a deep dive into permanent life insurance and its subtypes, including how they stack up to term life policies.
What is permanent life insurance?
Permanent life insurance is a life insurance policy that covers the policyholder for their entire life from the date of purchase. (This assumes that the policyholder continues to pay their premiums over time.)
These policies typically offer two key financial features: a death benefit and cash value. When the policyholder dies, the insurer pays the death benefit to the named beneficiary (or beneficiaries), who can use this money however they see fit.
Cash value is a savings component of some permanent life insurance policies. When policyholders pay their monthly premiums, some of this covers the cost of the policy while the rest goes to cash value. This accrues interest over time. Policyholders can borrow against life insurance cash value to help offset the cost of rising premiums, or to help pay expenses while they're still living.
Types of permanent life insurance
There are four main types of policies that fit the permanent life insurance definition. The best life insurance companies usually offer more than one type.
Whole life insurance
Whole life insurance is the most popular form of permanent life insurance. This is because it offers fixed premiums and a guaranteed rate of return on its cash value component, which is often kept in a bank or investment account. A few whole life policies also pay dividends to policyholders, which they can use to offset the cost of premiums, leave to accumulate more interest, or receive as cash. However, because of the guarantees they offer, these policies can be quite expensive.
Universal life insurance
Universal life insurance offers greater flexibility than whole life insurance. Policyholders can adjust the death benefit as needed. If they aren't able to keep up with the premiums, they can reduce the benefit amount (and therefore the premiums). They may also be able to use the cash value to help pay for the premiums. However, universal life insurance policies don't have a guaranteed rate of return, so the cash value component doesn't grow consistently.
Variable universal life insurance
Variable universal life insurance (VUL) is a subset of universal life insurance. This type of policy lets policyholders invest the cash value directly in stocks and other securities. This can help grow savings more quickly, but they can also lose money. These types of policies can carry higher fees.
Indexed universal life insurance
Indexed universal life insurance (IUL) is similar to VUL, but its cash value component is tied to a stock market index. Its rate of return is similar to that of the index, though IULs usually have limits on how much the cash value can grow in a year. There's usually a minimum return rate in place to prevent policyholders from losing money.
Term vs. permanent life insurance
Here are some of the key differences people find when they compare whole vs. term life insurance.
Length of coverage
Term life insurance provides coverage for a designated time, usually 10 to 30 years. Permanent life insurance, on the other hand, covers the policyholder for their entire life as long as they keep up with the premiums.
Cash value
Permanent life insurance often has a cash value component. The policyholder can access this to help pay premiums or cover expenses. Term life insurance doesn't have a cash value component. If the policyholder doesn't die within the term, the insurance company keeps all the money the policyholder has paid in.
Cost
Term life insurance policies are typically much more affordable than permanent life insurance policies, especially for younger adults. Premiums typically remain level over time, which isn't the case with all types of permanent life insurance.
What does permanent life insurance cost?
Permanent life insurance costs vary significantly depending on the age and health of the applicant and the amount of coverage. Permanent life insurance can cost thousands of dollars per year.
Typically, a $500,000 universal life insurance policy costs between $1,500 and $10,000 per year. A whole life insurance policy with the same death benefit could cost between $3,500 and $30,000.
Who should buy permanent life insurance?
Permanent life insurance is a good investment for those who have long-term coverage needs. For example, if a family member needs lifelong care, a permanent life insurance policy can help ensure this person is looked after once the policyholder passes on.
For most people, term life insurance is more affordable, and provides coverage for the time they need it. Most term life policies are convertible to permanent insurance if necessary.
