Understanding Permanent Life Insurance Policies

Insurance, Life Insurance
life insurance permanent types

If you’re shopping for life insurance and decide to buy a permanent life policy, there are many types of life insurance to choose from. Permanent life policies combine life insurance for the rest of your life and a cash value component.

Life insurance buyers often choose term insurance because it is cheaper, but permanent life insurance is a good fit for people who:

  • Need insurance protection no matter when they die.
  • Want to use life insurance as a way to leave money for heirs.
  • Want to be able to access the investment component of the policy.

But permanent insurance quotes are substantially more expensive than term life insurance quotes. A 35-year-old woman could expect to pay almost nine times more for whole life insurance than a term policy, according to Trusted Choice, and the cash value doesn’t always build up as planned.

Once you’ve decided to buy a permanent policy, you’ll need to navigate a variety of choices. Your decision depends on how much you want to risk the ups and downs of investments and how much payment flexibility you want.

Types of permanent life insurance

Whole life insurance. Whole life insurance policies have fixed premiums and a cash value component that (slowly) accumulates. You can take a loan against the cash value, but if you don’t pay it back the amount will be deducted from your death benefit.

Insurers often offer a variety of ways to pay the premiums, such as paying them up to age 100, paying for a fixed number of years (such as 10, 15 or 20 years while maintaining coverage after payments stop) and single-payment policies. When you die, your beneficiaries typically receive the face value of the policy, not the face value plus cash value.

Variable life insurance. Variable life insurance offers policyholders the opportunity to put their cash value in an investment account managed by the insurance company. Once in the account, earnings can be used toward your premiums or to add to your death benefit – if your investments do well. On the downside, if your investments do badly, you won’t have that money to put toward premiums, and your death benefit may decline, although companies typically have a guaranteed minimum death benefit.

Universal life insurance. The main draw of universal life insurance is that it allows flexibility with both your premiums and your death benefit. You can skip some payments if you want, but you need to maintain a minimum level of premium payment over the year. This gives you options as your life changes. Like other forms of permanent life insurance, universal life policies also have a cash value component that you can access.

Variable universal life insurance. What do you get when you mash together variable life and universal life? You get a policy with lots of moving parts. Your underlying cash value is subject to the ups and downs of the investments you choose. You can send in premium money any time, as long as you’re within minimum and maximum rules. You can typically choose a death benefit that’s equal to face value or face value plus cash value. But because of all these components, variable universal life (VUL) can be a pain to understand. James Hunt of the Consumer Federation of America wrote a detailed report on the many pitfalls of VUL.

Remember, never buy a policy you don’t understand.

Survivorship life insurance. These policies used to be called “second-to-die” policies, so they were an obvious candidate for re-branding. These permanent policies insure two lives at once – typically a husband and wife — and pay out when the second person dies. This is a good choice for couples who want to leave money to heirs only when both have passed away. They are also usually cheaper than insuring two lives separately.

If you’re looking at permanent life insurance for retirement goals, discuss it along with other options – like 401(k)s and annuities – with a financial advisor before making a decision.

Alice Holbrook is a staff writer covering insurance and investing for NerdWallet. Follow her on Google+.


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