Permanent life insurance lets you provide a financial safety net for your family and potentially build wealth. But the premiums are much higher than term life insurance policies, so it’s wise to see if the benefits permanent life insurance provides outweigh the costs before getting a policy. Here’s how permanent life insurance works and the benefits it offers so that you can decide if this type of policy is right for you.
What is permanent life insurance?
Permanent life insurance is a policy that offers lifelong coverage to your beneficiaries. Just like with other types of this insurance policies, you’ll pay premiums every month to maintain your coverage.
When you die, a permanent policy pays out a death benefit to your beneficiaries as a lump sum or in fixed payments. They can use this death benefit to pay for your end-of-life costs and to stay financially stable after you pass away.
Benefits of permanent life insurance
This type of insurance offers some excellent benefits to policyholders:
It offers lifelong coverage
Permanent life insurance policies never expire as long as you keep up on your premium payments. This can offer peace of mind that your loved ones have a financial safety net regardless of when you pass away.
It has cash value
Each time you pay a permanent life policy premium, part of it goes into your cash value or a growth component of your life insurance policy. This money grows tax-deferred, helping you grow another source of wealth without worrying about taxes.
You can do several things with your cash value once it’s large enough, depending on the type of permanent policy you have:
- Withdraw from the cash value.
- Borrow against the cash value (with no credit check, a low rate, and no defined repayment date).
- Pay premiums with the cash value (on specific types of permanent policies).
- Surrender your policy and take the cash value all minus surrender charges.
You can earn dividends
Some permanent life insurance policies pay their policyholders dividends. You can take these as cash, pay premiums with them, and sometimes use them to reinvest in your cash value.
There are several types
There are several kinds of permanent life insurance policies that offer different features:
- Whole life: This type of life insurance comes with fixed premiums and a death benefit. The cash value grows at a fixed, guaranteed rate.
- Universal life: Universal life insurance has an adjustable death benefit. Cash value grows at a fixed rate, but you may be able to pay premiums with it.
- Final expense: This is a small whole life policy with a death benefit large enough to cover end-of-life costs, such as funeral expenses. They cost less than traditional whole life policies and can be easier to qualify for.
- Indexed universal life: You can also get an adjustable death benefit with indexed universal life insurance. The cash value is invested in a fund that tracks a market index for more potential gains. But keep in mind that these policies also generally offer a minimum interest rate guarantee.
- Variable life: Variable life insurance has an adjustable death benefit. You can invest cash value in stocks and bonds for more potential growth, but there’s no minimum guarantee to protect against losses.
Is permanent life insurance right for me?
Although permanent life insurance premiums can be more expensive, the lifelong coverage these policies provide can make the costs well worth it. If you have multiple dependents, such as a family, and want them to be provided for if you die, then permanent insurance can make sense. This is especially true if you have complex long-term financial goals since the cash value can help you grow more wealth tax-deferred.
Older adults can also benefit from permanent life insurance policies, especially final expense insurance. Final expense insurance can help their loved ones pay for medical bills, a funeral, and other end-of-life costs. Whichever policy you prefer, remember to evaluate your circumstances and financial situation before deciding if permanent life insurance is a good investment for you.
