What is permanent life insurance?
Permanent life insurance is a generic term for life insurance policies that do not expire. Generally, permanent life insurance combines a death benefit with a savings portion.
The two main types of permanent life insurance are whole life and universal life. Whole life insurance provides coverage for the life of the insured and their savings can grow at a guaranteed rate. Universal life insurance also offers a savings element in addition to a death benefit, but offers different types of premium structures and earns depending on market performance.
How Permanent Life Insurance Works
Unlike term life insurance, which promises payment of a specified death benefit for a given period, permanent life insurance lasts for the life of the insured (hence the name), unless non-payment of premiums results in forfeiture of the policy.
Permanent life insurance premiums are used both to maintain the death benefit from the policy and to allow the policy to create cash value, against which the policy owner can borrow funds or, in some cases, withdraw outright money to meet needs such as paying for a child’s college education. or cover medical costs.
There is often a waiting period after purchasing a permanent life insurance policy, allowing to accumulate a sufficient cash value, before borrowing on the savings portion is allowed. If the total amount of unpaid interest on a loan, plus the balance of the current loan, exceeds the cash surrender value of your policy, the insurance policy and all coverage will end.
Key points to remember
- Permanent life insurance refers to coverage that never expires, unlike term life insurance, and combines a death benefit with a savings component.
- The two main types of permanent life insurance are whole life and universal life.
- Permanent life insurance policies benefit from favorable tax treatment.
- Some term life insurance policies offer the option of converting to permanent life.
Permanent life insurance and taxes
Permanent life insurance policies benefit from favorable tax treatment. The growth in the cash value is generally carried out with tax deferral, which means that the policyholder pays no income tax as long as the policy remains active.
As long as certain premium limits are met, money can also be withdrawn from the policy without being subject to tax, since policy loans are generally not considered taxable income. As a general rule, withdrawals up to the total premiums paid can be made without being taxed.
Conversion of temporary life into permanent life
Different people have different insurance needs at different times in their lives. Term life insurance is appreciated for its lower premiums, but generally expires well before the end of the policyholder’s life.
While the goal is to have paid off most debts and other financial obligations by that time while accumulating enough savings to make a large amount of life insurance unnecessary, some people may prefer continued coverage and savings opportunities, etc. might want a new permanent policy.
For this reason, many term life insurance policies offer the option of converting to permanent policies later, often without the need for medical examinations or re-qualification. Such a feature could make it attractive to someone with medical conditions who could make a new policy prohibitive, for example, or with chronic illnesses that require ongoing expenses that could be drawn from the savings portion.
Although the premiums for permanent life insurance are much more expensive than those for term insurance, often those who would subscribe to such policies have earned enough money at this stage of life to afford them. With the additional opportunity to save, they can also use it as a tax-efficient investment vehicle to cover the needs of dependents for life, for example, or for estate planning purposes.