Takeaways
- Permanent life insurance covers you for your entire life and doesn’t expire.
- Permanent life insurance has a death benefit plus a cash savings value.
- Permanent life insurance comes in two forms: whole life and universal life.
- Permanent life insurance proceeds are not taxable to beneficiaries.
- Premiums for permanent life insurance premiums are higher than term-based policies.
What Is Permanent Life Insurance?
Permanent life insurance is a type of insurance policy designed to cover you for your lifetime as long as you stay current on your insurance premiums.[1] Unlike term life insurance, which only covers you for a predetermined term, permanent coverage does not expire and builds up a cash value component over time.
Due to the static nature of the coverage policy and the savings portion of permanent life insurance, which grows tax-deferred, it is more expensive than term life insurance. There are two main types of permanent life insurance:
- Whole Life Insurance: death benefits; fixed growth rates
- Universal Life Insurance: death benefit plus cash value; variable growth rates
Choosing the best policy for you involves aligning the plan's death benefits and savings component with your family's needs. Beneficiaries are paid the policy's death benefit and savings when a death benefit occurs. These funds can close the income gap a policyholder leaves behind, pay for major expenses like a mortgage, or fund education.
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How Permanent Life Insurance Works
Permanent life insurance is policy coverage that lasts your lifetime and builds a cash value at a rate set by the insurance company and your policy.
The cash value of whole life and universal life insurance plans is significantly different between the plans. Generally speaking, universal life insurance plans are more flexible. With a universal life insurance plan, your premiums can be flexible, and you can elect for your cash value or savings earnings to grow with market interest rates. In contrast, whole life insurance premiums are set once the policy begins. Additionally, the cash value of whole life insurance grows at a guaranteed rate.
With permanent life insurance, premiums are fixed when you purchase the policy. When you make a premium payment, one portion goes toward insurance and the other to increase your cash value. More conservative policyholders tend to opt for a guaranteed growth rate for their cash value.
Policyholders can borrow against the cash value of their plans through special policy loans or withdrawals. Insurers set a limit for money you can borrow, which is usually capped at 90% of your policy’s cash value.[2] Like regular installment loans, life insurance companies charge interest on policy loans. Coverage can even be terminated or lapse if a life insurance policy loan's total interest and outstanding balance exceed your policy's cash value.[3]
Tax Treatment of Permanent Life Insurance
Permanent life insurance benefits are tax-advantaged, which means they get favorable tax treatment from the IRS. Here’s how it works:
- Cash Withdrawals: Cash withdrawals up to your insurance premium payments are generally not taxable.
- Cash Value Earnings: Cash or savings values grow tax-deferred. This means policyholders and beneficiaries don't pay taxes on gains and earnings as long as the funds remain in the policy. (This works similarly to a 401k plan).
- Life Insurance Proceeds: Generally speaking, insurance proceeds received from a beneficiary due to the death of an insured policyholder are not included in your gross income, and you don’t need to report them.[4]
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When To Get Permanent Life Insurance
Many people think about getting permanent insurance while at the intersection of increasing net worth and family commitments. Most prospective policyholders are looking for lifetime insurance coverage and a way to build savings with the policy.
For many people, this usually occurs when you start accruing long-term commitments, like buying your first home, having children, or getting married. As you start to mature in your career and amass investments and retirement savings, you might start to think about your legacy or leaving an inheritance.
Permanent life insurance can be critical in diversifying your entire financial ecosystem. It helps ensure your family doesn't have to worry about final expenses, gets a nice cash payout, and can fund living expenses without worry. Let's look at what it covers.
Read Also: When to Get Car Insurance
What Does Permanent Insurance Cover?
Life insurance proceeds can be used at the beneficiary’s discretion. However, proceeds are typically used to replace lost income, daily expenses like groceries and mortgage payments or rent, pay for your burial expenses, and pay off debts.
Your policy's cash value component can be an invaluable financial tool. Your life insurance policy acts as a source of capital that you can tap when needed. You can borrow from it or withdraw from it.
Related: What Is a 401(k) Loan?
Cost of Permanent Life Insurance
The amount you will pay for your permanent life insurance premiums depends on a long list of variables. Your age, health, and policy amount are among the top factors. Additionally, insurance riders will almost always boost your monthly premiums because they are not part of the initial policy.
Here’s a look at an example whole life insurance policy based on $250,000 worth of coverage:
| Men | Woman | |
|---|---|---|
| 20 Years Old | $169/month | $146/month |
| 30 Years Old | $283/month | $205/month |
| 40 Years Old | $355/month | $296/month |
| 50 Years Old | $543/month | $462/month |
Source: Aflac [5]
Variables Affecting Permanent Life Insurance Costs
When you look for quotes on permanent life insurance policies, insurers will need a lot of personal information to determine your premiums. Some of the variables that are considered are your:
- Age
- Heath
- Type of Policy
- Smoking habits
- Hobbies
- Occupation
- Family health history
Tobacco use, high-risk hobbies, or hazardous jobs can all push your premium higher. The amount you elect to be your death benefit also impacts premiums.
Pros of Permanent Life Insurance
- No Policy Expiration: Coverage does not expire, which means your beneficiaries receive the death benefit no matter when the policyholder’s death event occurs.
- Tax Deferred Growth: The Cash value can grow in a tax-deferred environment and be accessed through policy loans or withdrawals before death.
- Fixed Premiums: Premiums can be locked in when you buy the policy, allowing more predictable ongoing costs.
- Access to Cash: You can tap your insurance premiums and your policy's cash value policy if you need quick access to funds.
- Proceeds Tax-Advantaged: Beneficiaries do not have to include insurance proceeds in their gross income when filing income taxes.
Cons of Permanent Life Insurance
- High Premiums: Premiums are often higher than term life insurance, which can strain your budget if you only need temporary coverage.
- Potential Policy Lapse: Policy loans or withdrawals from the cash value can reduce the death benefit if not repaid, affecting what your beneficiaries receive.
- Lack of Flexibility: Term life insurance policies allow you to sign up for varying coverage lengths. You may not want permanent coverage if, for example, you only want security past your children going to college.
Smart Summary
Permanent life insurance policies don't expire until the policyholder dies. These insurance policies tend to come with a death benefit and cash value. Policyholders can access their cash value, borrow from their policy, and withdraw premiums as needed. Permanent life insurance plans can secure lifestyles and give families financial security. If permanent life insurance seems too expensive, you can always opt for term life insurance.
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(1) Insurance Information Institute. What are the principal types of life insurance? Last Accessed April 1, 2025.
(2) Progressive. How to borrow against a life insurance policy. Last Accessed April 1, 2025.
(3) Guardian. What are the principal types of life insurance? Last Accessed April 1, 2025.
(4) Internal Revenue Service. Life insurance & disability insurance proceeds. Last Accessed April 1, 2025.
(5) Aflac. Whole Life Insurance Rates by Age Chart. Last Accessed April 1, 2025.
