What is Permanent Life Insurance?

Wouldn’t it be helpful to have a life insurance policy that provides lifelong coverage and can also build cash value over time? That’s where permanent life insurance comes in. 

Permanent life insurance provides a death benefit to your beneficiaries and is designed to remain in force for your lifetime, as long as the policy remains active. Unlike term life insurance, many permanent policies have a cash value component that can grow over time.  

Depending on the policy you choose, you may be able to access this cash value even while you’re alive. In this guide, you’ll learn how permanent life insurance works, the different types of permanent policies, how much they cost, and what to consider when choosing one.   

How Does Permanent Life Insurance Work? 

With permanent life insurance, you pay premiums in exchange for a death benefit that can remain in place for your lifetime. Many permanent life insurance policies also build cash value over time, which you may be able to access while you’re alive through policy loans or withdrawals.  When you die, your beneficiaries generally receive the policy’s death benefit. In most policies, the accumulated cash value is not added to the death benefit. However, some policies offer an increasing death benefit option.  

For example, certain universal life policies may pay the policy’s stated death benefit plus its accumulated cash value. Now, to understand how permanent life insurance works, let’s take a closer look at its two key features: financial protection and cash value accumulation. 

Financial Protection  

The primary purpose of permanent life insurance is to provide financial protection for your beneficiaries after your death. When you die, the insurer generally pays the policy’s death benefit to the beneficiaries you named, as long as the policy is in force and the claim meets its terms. 

Your beneficiaries can generally use the death benefit for expenses such as replacing lost income, paying off a mortgage or other debts, covering funeral and final expenses, or meeting ongoing household and financial needs. Since permanent life insurance is designed to provide coverage for your lifetime, the death benefit can remain available regardless of when you die, provided the policy remains in force. 

Cash Value Accumulation  

Many permanent life insurance policies build cash value as you pay premiums. The cash value grows over time according to the policy type and its terms, and you may be able to access it while you’re alive through withdrawals or policy loans. 

The way cash value grows typically varies by policy. For example, whole life insurance generally offers guaranteed cash-value growth, while universal life policies may offer more flexibility. Variable and indexed policies can have cash-value growth tied to investment performance or the performance of a market index, subject to the policy’s terms and limitations. 

Keep in mind that the cash value and death benefit are generally separate. In most policies, your beneficiaries receive the stated death benefit rather than the accumulated cash value when you die. However, some policies, such as universal life with an increasing death benefit option, may provide a death benefit that includes the accumulated cash value. 

Types of Permanent Life Insurance You Should Know  

Permanent life insurance is one of the two broad categories of life insurance, alongside term life insurance. Within permanent coverage, there are several policy types, each with different approaches to premiums, cash value, death benefits, and policy flexibility. Understanding how the types of life insurance differ can help put these permanent policy options into context. 

The main types of permanent life insurance include whole life, universal life, variable life, variable universal life, indexed universal life, guaranteed universal life, survivorship life, and final expense insurance. While they all provide permanent coverage, the way they work and the features they offer can vary significantly. 

Whole Life Insurance    

Whole life insurance provides lifelong coverage as long as you continue meeting the policy requirements. It typically offers a fixed death benefit and fixed premiums, making its costs and coverage more predictable than some other types of permanent life insurance. 

The policy generally provides guaranteed cash-value growth according to its terms, and some participating policies may also earn dividends that can be used in different ways, such as purchasing additional coverage.  By combining lifelong death benefit protection with cash-value accumulation, whole life insurance can be used for long-term financial protection and other financial planning needs. 

Universal Life Insurance (UL) 

Universal life insurance is designed to provide lifelong coverage with flexibility in how the policy is funded and managed. Depending on the policy, you may be able to adjust your premium payments and death benefit within certain limits.  The policy can also build cash value, which generally earns interest based on the policy's terms. You may be able to access the cash value through withdrawals or policy loans while you're alive. The accumulated cash value may also help cover certain policy costs, depending on the policy structure. 

Universal life insurance may offer different death benefit options. A level death benefit generally pays the stated amount, while an increasing death benefit may pay the stated amount plus the accumulated cash value.  

Variable Life Insurance (VL) 

Variable life insurance combines lifelong coverage with investment-based cash value growth. You can generally allocate the policy's cash value among investment options, such as separate accounts that invest in stocks, bonds, or other securities. 

As the cash value is tied to the performance of the selected investments, its value can increase or decrease over time. This means the policyholder takes on investment risk, while the policy's death benefit generally remains subject to the policy's guarantees and terms. 

Variable life insurance may also allow you to change how your cash value is allocated among the available investment options. The policy's fees, investment choices, guarantees, and other terms can affect how much cash value ultimately accumulates. 

Variable-Universal Life Insurance (VUL)   

Variable-universal life insurance combines the investment-based cash value growth of variable life insurance with the flexibility of universal life insurance. Its cash value is allocated among investment options, such as stocks, bonds, or other securities, so its value can rise or fall based on investment performance. 

While a variable life policy generally requires a more structured premium arrangement, a VUL policy can allow you to adjust your premium payments within the policy’s limits. This flexibility can give you more control over how you fund the policy over time. 

For example, if your financial situation changes and you cannot afford to maintain the same premium payment, a VUL policy may allow you to reduce the amount you pay. However, paying less can reduce how quickly the cash value grows and may affect whether the policy remains active. 

Indexed Universal Life Insurance (IUL)   

Indexed universal life insurance links the growth of its cash value to the performance of a market index, such as the S&P 500, rather than directly investing your cash value in the market. The policy still provides a death benefit, and its cash value can grow based on the index's performance, according to the policy's terms. 

IUL policies typically use features such as caps, floors, and participation rates to determine how much of an index's gains are credited to the cash value. For example, if the index gains 8% but your policy has a 6% cap, only 6% may be credited to your cash value. If the index performs poorly, a floor may limit the amount of credited loss, potentially to 0%, depending on the policy. 

This structure allows an IUL policy to offer cash-value growth linked to market-index performance without directly investing the cash value in the market. However, the amount of cash value you accumulate depends on the policy’s crediting method, fees, limits, and other terms. 

Guaranteed Universal Life Insurance (GUL)   

Guaranteed universal life insurance is designed primarily to provide long-term death benefit protection with predictable premiums. Unlike many other permanent policies, GUL generally focuses less on building cash value and more on maintaining coverage for a specified period, which may extend to a person's lifetime. 

You typically pay a set premium to keep the policy in force, and the death benefit is generally guaranteed as long as you meet the policy's premium and other requirements. This can make GUL useful for people who want long-term life insurance protection without placing as much emphasis on cash-value accumulation. 

For example, a GUL policy may be structured to provide a $500,000 death benefit through age 100 or longer, as long as you continue making the required premium payments. Simply put, the premium amount and the age through which the death benefit is guaranteed are set when you purchase the policy. 

Survivorship/Joint Life Insurance   

Survivorship or joint life insurance, also called second-to-die life insurance, covers two people under one policy and pays the death benefit after both insured individuals have died. It is commonly used by couples who want to provide financial support for beneficiaries or address estate-planning needs. 

The policy typically continues after the first person dies, so the surviving policyholder does not receive the death benefit at that time. Instead, the beneficiaries receive the death benefit after the second insured person dies, as long as the policy remains in force. 

For example, a married couple could purchase a survivorship policy with a $1 million death benefit. If one spouse dies, the policy remains active for the surviving spouse. When the second spouse dies, the beneficiaries receive the $1 million death benefit according to the policy's terms. 

Final Expense/Burial Life Insurance   

Final expense or burial insurance is a type of permanent life insurance designed to help you cover end-of-life expenses. These policies typically offer smaller death benefits, often ranging from $5,000 to $25,000, making them suitable for expenses such as funeral and burial costs, outstanding medical bills, or other final debts. 

You generally pay premiums throughout your lifetime, and the policy may build cash value depending on its structure. When you die, your beneficiaries can use the death benefit to help pay for funeral arrangements and other expenses. 

For example, you could purchase a $25,000 final expense policy to help your family cover funeral costs, medical bills, and other outstanding expenses after your death. Your beneficiaries can generally use the death benefit according to their financial needs and the policy’s terms. 

What Does Permanent Life Insurance Cover and Not Cover?  

If you’re thinking of purchasing a permanent life insurance policy, you need to know what the policy covers and when your beneficiaries can expect to receive the death benefit. While permanent life insurance generally covers most causes of death, certain exclusions and policy provisions may limit or prevent a payout.

What permanent life insurance generally covers: 

Natural causes: Death resulting from illness, disease, or other natural causes is generally covered. 

Accidental death: The death benefit generally applies if you die as a result of an accident. 

Financial needs after your death: Your beneficiaries can generally use the death benefit for expenses such as funeral costs, mortgage payments, debts, or ongoing household expenses. 

Most other causes of death: Permanent life insurance generally covers other causes of death unless specifically excluded by the policy. 

What permanent life insurance typically does not cover:  Suicide during the exclusion period: Most policies have a suicide exclusion period, commonly the first two years of coverage. 

Fraud or material misrepresentation: Providing false or intentionally misleading information on your application can affect your coverage or a future claim. 

Illegal Acts: Dying while committing a felony or any serious crime could lead to policy termination, where exclusion of coverage may apply.  

Dangerous Activities: Certain policies may exclude deaths resulting from high-risk activities, such as specific types of aviation, extreme sports, or other hazardous activities.  

The Slayer Rule: If a beneficiary intentionally causes the insured's death, they generally cannot collect the life insurance benefit. State laws determine how the death benefit is handled in these circumstances. 

Unpaid Loans: If you take out a loan against your policy and do not repay it, the outstanding loan and interest may reduce the death benefit your beneficiaries receive. 

Missed Premiums: Failing to pay your premiums can cause your policy to lapse after any applicable grace period. If the policy is no longer in force when you die, your beneficiaries generally will not receive the death benefit.

What Are the Pros and Cons of Permanent Life Insurance?  

Permanent life insurance can provide lifelong financial protection while offering features such as cash-value accumulation. However, these additional features can also make permanent policies more complex and costly. 

Understanding the advantages and potential drawbacks can help you determine whether permanent life insurance aligns with your financial needs and long-term goals.