Permanent life provides death protection for as long as you live. In addition, permanent life insurance policies can build a cash value, money that you can borrow against and, in some instances, withdraw to help meet future goals, such as paying for a child's college education. Permanent life insurance also has better tax advantages over term life insurance. Think of Permanent life as owning property.
Basic Permanent Life Features
- Provides coverage for as long as premiums are paid, or as long as there is sufficient cash value within the policy to pay for itself.
- Level, guaranteed premiums.
- The ability borrow or withdraw from your policy, usually not though until the policy has been in force for a few years.
- Favorable tax treatment.
- Cash value generally grows on a tax-deferred basis, meaning that you pay no taxes on any earnings in the policy so long as the policy remains in force.
- Cash value may be taken out of the policy income tax free, as long as you adhere to certain premium limits.
- Premiums are more than Term Life Insurance, but builds cash value.
- Any unpaid loans, loan interest, and withdrawals will be deducted from the overall death benefit, which could lead to inadequate protection to the beneficiary.
In the early years of a permanent policy, the majority of the premium dollars are used to help generate cash values so that the premium will stay level in later years, as you get older.
If there is sufficient cash value within the policy it can be used to pay future premiums, unlike in term where once premium payments cease, so does the insurance.
When is permanent insurance right for you?
Permanent insurance will make sense if you have a long-term need and can afford to pay for the permanent coverage. In the long run, permanent insurance will typically cost less because the premiums stay level and don’t increase as you get older. With term it only stays level for the specified term length you elect (i.e. 5, 10, 15, 30 years etc.). It will also make sense if you need to diversify your investments into tax-favored programs. The cash values accrue tax deferred and can be used to help supplement retirement income, education expenses or any other future need.
There are four kinds of Permanent Life Insurance: