Buyers Guide to Permanent Life Insurance

Learn the features—and the pros and cons—of permanent life insurance.

By , Attorney

Permanent life insurance comes in many shapes and sizes. So long as you pay the premiums, this type of insurance is in effect from when you buy the policy to when you pass away. But before you buy a policy, you should learn how it works, and explore the different kinds of coverage to find out which is right for your situation.

Permanent Life Insurance: How It Works

Permanent life insurance is a form of insurance policy that includes a death benefit and cash value savings. With few exceptions, after you've been approved for the coverage, the insurer can't cancel your policy.

Many permanent policies are eligible for dividends. While dividends aren't guaranteed, many companies offer the option to apply current and accumulated dividend values towards payment of all or part of the premiums. So, your out-of-pocket premium payments could go down, but the coverage continues for your entire life. You could also take the money as cash or use the dividends to buy more coverage.

Here's a quick guide to different kinds of permanent life insurance, including whole life insurance, universal life insurance, variable life insurance, and more.

What Is Whole Life Insurance?

Whole life insurance—sometimes called "straight life insurance"—provides a set dollar amount of coverage that won't expire in exchange for fixed, uniform payments. As with most permanent life insurance policies, this policy offers a savings component (called its "cash value") and a death benefit to your beneficiaries when you die. (A portion of the premium money goes toward the cash value.)

How Universal Life Insurance Works

Universal life combines some of the desirable features of both term and whole life insurance and offers other advantages, including:

  • Over time, the net cost is lower than whole life insurance.
  • You build up a cash reserve, as with whole life.
  • You can vary the premium payments, amount of coverage, or both, from year to year. In contrast, whole life requires one set payment amount, which can't be varied, for the life of the policy. This flexibility is a key difference between universal life insurance and whole life insurance.

Variable Life Insurance and Variable Universal Life Insurance

Variable life insurance refers to policies in which cash reserves are invested in securities, stocks, and bonds. In a sense, these policies combine an insurance feature with a mutual fund. That means your investment return is tied to the financial markets' performance.

Variable universal life insurance is a type of whole life insurance that combines the premium payment and coverage flexibility of universal life insurance with the investment opportunity—and risk—of variable life insurance.

Single-Premium Life Insurance

With single premium life insurance, you pay, up-front, all premiums due for the full duration of the policy. No additional payments are required. Once you've paid for the single premium policy, you get a permanent death benefit that extends until you die. Getting this type of policy requires a large chunk of cash—like $5,000, $20,000, or $50,000—depending on your age and the dollar amount of the policy.

Survivorship Life Insurance

Survivorship life insurance—also called "second to die" life insurance—involves a single policy that insures two lives, usually spouses. When the first spouse dies, no proceeds are paid. Instead, the policy remains in force, and the surviving spouse must continue to pay premiums. The policy pays off only upon the death of the second spouse.

Pros and Cons of Permanent Life Insurance

Again, permanent life insurance policies offer lifelong coverage and typically have a cash value component. As your cash value grows, you may withdraw your cash value or take out a policy loan. (But if you don't repay policy loans with interest, your death benefit is reduced.) Term life insurance, on the other hand, doesn't provide any cash value. So, this kind of insurance doesn't have any investment component. And, if the policy expires, you'll likely have to reapply to get coverage.

Generally, the most significant consideration when thinking about buying life insurance is how much coverage do you need for your family if something unfortunate happens to you? Because permanent life insurance policies have much higher rates than term policies, permanent life insurance is generally undesirable for younger people with children and lots of expenses. Instead, term insurance might be a better option. Term life insurance can be a good option if your family's financial needs are temporary, like paying off a mortgage, covering the costs of college, or repaying debts. Also, some term policies are convertible. Within a specific amount of time, you can change a term policy to a permanent policy.

To get advice about which insurance policy is right for your situation, consider talking to an estate planning lawyer or qualified life insurance professional.

Learn More

If you're ready to buy life insurance or plan your estate, read Plan Your Estate by Denis Clifford (Nolo), a comprehensive guide to all the significant estate-planning options available. You can also visit Allstate's Website, which gives a comprehensive overview of permanent life insurance, the types of permanent life insurance available, and the benefits of the various policies.

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