Who should get permanent life insurance?

Permanent life insurance can allow you to continue to support your family members and ensure that they are financially protected after you pass away. This is a life insurance policy that never expires and pays a benefit upon the policyholder’s death. Here is what you need to know about permanent life insurance to help you decide if it is right for you. If you want hands-on guidance in deciding whether permanent life insurance is for you, consider enlisting the help of an expert financial advisor who serves your area.

The two common types of life insurance are term life insurance and permanent life insurance. With a term life insurance policy, your coverage is temporary and only lasts a set number of years. Typically, policyholders will have coverage for 10, 15, 20, 25 or 30 years.

Permanent life insurance coverage never expires and pays a benefit upon the policyholder’s death. Additionally, many permanent life insurance policies have a cash value component, and so they are sometimes referred to cash value insurance policies. With a cash value component, a portion of your premium payment goes toward cash accumulation, which grows on a tax-deferred basis. As a policyholder, you can usually borrow against the cash value of your policy. However, this is not commonly advised.

There are several types of permanent life insurance policies. Some policies include:

This is the most common type of permanent life insurance. Whole life policies offer a death benefit as well as a savings component. You will pay regular premiums for a set death benefit amount. The savings portion of this policy is contingent upon the dividends that a company pays.

Also known as adjustable life insurance, universal life insurance policies have more flexibility than whole life policies. Universal policies have adjustable premiums that are typically lower than whole life insurance premiums.

Variable universal life insurance policies also have a savings component that you can invest in stocks, bonds and money market funds. The value of this policy can grow quickly, but the risk of the stock market may affect the value as well. Some variable universal life policies have a guarantee that your death benefit will not fall below a minimum amount.

With indexed universal life insurance, policyholders can allocate the cash value of the policy to a fixed account or an equity index account. If you choose this type of policy, you can grow your cash value tax-deferred for retirement while still growing your death benefit.

Guaranteed life insurance has a guaranteed death benefit provided that the policyholder pays the premiums to keep the policy active. It typically has lower premiums than whole life insurance, because it does not have a cash value accumulation.

The biggest advantage of buying a permanent life policy is that it provides coverage for your entire life as well as a cash value component that can grow over time. This way you will know that your beneficiaries will be taken care of no matter when you die.

Here are a few other benefits you should be aware of:

Again, many permanent life insurance policies have a cash value component that helps your death benefit grow as well as helps hedge against inflation. Essentially, the cash value of your policy makes your death benefit worth more than it would be without it. Also, as your cash value grows, you can take it out to supplement your retirement income or use it as a loan. If you choose to take a loan, this money is considered tax-free income.

Another advantage of this type of insurance policy is that there are some types of permanent life insurance that you can stop making payments and continue enjoying the benefits of the coverage. For example, some policies may allow you to pay higher premiums for a shorter amount of time such as 10 years and then never have to pay a premium again.

Permanent life insurance policies offer a variety of tax advantages. Some of these advantages include a tax-free death benefit, tax-deferred cash value growth, income tax-free dividends and tax-free policy loans and withdrawals.

While there are advantages to purchasing this type of policy, there are also downsides. Three of the most common downsides to buying a permanent life insurance policy (mentioned below) are the costs of such policies, the possibility of the policies lapsing so no benefit is ever paid and the fact that they cannot be converted into another type of policy. In addition to these three downsides, the terms of permanent life insurance policies are more complex than those of term life alternatives and thus harder for customers to understand. Finally, because of the higher premiums, these policies may produce a mediocre return on the investment.

The biggest drawback to a permanent life insurance policy is that it is significantly more expensive than term life insurance. Often, people do not need coverage past a certain amount of time. Therefore, it frequently makes more sense to purchase a term policy that you can convert in case you end up needing coverage for a longer amount of time.

If you miss a payment or cannot afford to make payments anymore, your policy could cancel. If your policy cancels, you may have to buy another policy, which means you would be essentially starting over – and perhaps at a higher premium.

While the longevity of permanent life insurance policy is a benefit it is also a disadvantage. This is because if you buy a policy and discover you no longer need coverage, you would have paid premiums up until this point. Therefore, you would lose all the money you had already paid into the policy.

Generally, there are a few reasons a permanent life insurance policy might be worth considering. Some reasons include:

To avoid paying hefty estate taxes, you can leave your loved ones a life insurance policy. Life insurance policies are typically tax-free for your beneficiaries. This means that the funds from your life insurance policy can be used to pay estate taxes and still leave money for them to use after your passing.

If it is important for you to leave a legacy, then you can leave your life insurance policy to a family member, charitable organization or nonprofit.

If you know that you will die with a mortgage, medical bills or other debts, a permanent life insurance policy can help pay those debts. This will prevent your family from becoming responsible for these financial burdens.

Permanent life insurance policies can fund buy-sell agreements, which would pay off your share of a business. Life insurance policies can also be taken out on employees to help the business stay afloat in case of the loss of a key person, such as a founder, executive or other vital managers.

If your family relies on your income, then your untimely death may financially devastate them. Therefore, a life insurance policy can help them pay regular bills, keep up on the mortgage or rent and handle other financial obligations.

Buying life insurance can be complicated, and sometimes customers mistakenly pick a type of policy that is not in their own best interest. Permanent life insurance is one way to financially protect your loved ones as well as to build wealth. Permanent life insurance policies vary depending on your needs and your budget. Before committing to buy a permanent life insurance policy, whether whole life or cash value, universal or variable, make sure you know what you’re getting – and not getting.

While permanent life insurance is more expensive and complicated than term life insurance, there are some cases where it can make sense to purchase this type of policy. If you’re considering a permanent life insurance policy, here’s what you need to know before you make your final decision.

Permanent life insurance policies generally provide lifelong coverage and the opportunity to build cash value, which accumulates on a tax-deferred basis. You can tap into the policy’s cash value while you’re alive. The coverage length, cash value and policy charges are why permanent life insurance is more expensive than term life.

Permanent life insurance policies include types of insurance like whole life insurance and universal life insurance.

If you decide to cancel or surrender the policy at any time, you can receive the cash value of the account but may have to pay a surrender charge, if there is one.

Whether you need a permanent life insurance policy or a term life policy depends on why you need life insurance.

Permanent life insurance is good for people who want to build cash value. It’s also better than term life insurance for people who want to make sure there is a death benefit payout for their loved ones when they die.

A few typical goals that lead people to permanent life insurance include:

If you want the most affordable life insurance coverage, term life insurance is your better bet. Term life may also be better if your main objective is to pay off your mortgage or replace your income during peak earning years.

When you make premium payments on a permanent life insurance policy, a portion of the money goes toward a cash value account. Once you build up the cash value in the account, you can borrow against it or withdraw it. But if you’ve depleted your cash value and there’s not enough money within the policy to cover policy charges, you may have to pony up more premiums in order to prevent the policy from lapsing.

If you took out a loan from the cash value that you haven’t paid back, the loan amount and interest will be deducted from the death benefit if you pass away.

If you decide you no longer want a permanent policy, you may be able to walk away with some cash value. If you terminate the policy, the insurer will give you the cash value minus any surrender charge.

There are multiple types of permanent life insurance that vary in terms of how cash value builds and how much flexibility policyholders have.

A whole life insurance policy has fixed and guaranteed premiums, rate of return on cash value and death benefit. The cash value component increases over time based on your interest rate. You can withdraw funds or take out a loan against the cash value.

There are several reasons consumers purchase whole life insurance over other types of permanent policies. First is its predictability, due to the guarantees within the policy.

Another advantage of a whole life policy is that you usually have the opportunity to earn dividends every year. Dividends allow policyholders to share a part of the profitability of a mutual insurance company. While dividends are not guaranteed, you can take the money as cash, use it to pay your premiums, or plow it into your cash value.

Additionally, the growth of the cash value component of the policy is tax-deferred. You’ll pay a tax on gains if you surrender the policy and take the cash value. You won’t pay tax on the portion you take that was from your premium payments.

As with any life insurance policy, the death benefit to your beneficiaries is paid tax-free.

Whole life insurance also has some downsides:

Universal life insurance (UL) policies often offer more flexibility than whole life insurance policies. You may be able to adjust your premium payments and death benefit within certain parameters.

The cash value gains within a universal life insurance policy will vary depending on the type of UL policy you buy:

Your choice of universal life insurance will be based on how much investment risk you want and how much you desire to manage subaccounts.

Universal life insurance tends to be less expensive than whole life insurance policies, but still more expensive than term life insurance.

Additionally, universal life may not have fixed costs within the policy. The premium you pay is split among the cash value account, the cost to insure you and policy charges and fees. But many policy costs increase as you age. If you’ve dipped into your cash value, you might be stuck paying more premiums to cover the charges and keep your policy in force.

Variable life insurance offers a death benefit with a cash value component that you can allocate across a variety of investments including stocks, bonds, and money market funds. The investments you select will determine the level of gains or losses within your cash value.

Variable life insurance is designed for those who are willing to assume more investment risk. While you may be able to achieve a greater return than you would see with a whole life policy, you’re also taking on more risk.

If your cash value does well, you could use the gains to pay some of your premiums for the policy.

Additionally, a variable life insurance policy’s fees and expenses can significantly reduce the portion of your premium payments that go toward the cash value. Variable life insurance policies have mortality and expense fees, administration fees, investment management fees and more.

If you’re considering variable life insurance, make sure to understand what parts of policy are guaranteed (such as cash value) and which are not.

Burial insurance, also known as funeral insurance or final expense insurance, is a small whole life insurance policy with a death benefit that’s usually between $5,000 and $25,000. These policies are generally sold without a medical exam and you can’t be turned down. Consumers with health issues and/or with tight budgets tend to buy this type of permanent life insurance to cover their burial or funeral costs.

Burial or final expense insurance is designed only to help your beneficiaries cover funeral costs and other miscellaneous expenses after you die. It has a high cost based on the amount of coverage you get.

Burial insurance is not intended to help your family pay for other financial priorities such as college tuition, mortgage payments or daily living expenses.

Survivorship life insurance is sometimes called “joint life insurance” or the more eyebrow-raising “second-to-die life insurance.” It’s usually a whole life insurance policy. It differs from other permanent life insurance policies because the policy insures two people—usually a married couple. Once both spouses have passed away, the policy pays out the death benefit to the beneficiaries.

Survivorship life insurance is often used to fund a trust so that beneficiaries can pay estate taxes and other estate settlement expenses.

Survivorship life insurance is generally less expensive than buying two separate policies on the same people. This is especially true if one of the people to be insured has medical problems. Additionally, a survivorship policy is easier to qualify for than a policy for one individual. Since both policyholders must pass away before the policy pays the death benefit, insurers are less concerned if one applicant is less insurable due to health issues.

But this type of policy doesn’t work well if both spouses rely on one another financially. Also, if you and your spouse decide to divorce, you may want to undo the policy. If this is a concern, some insurers may allow you the “right to split” the policy into two individual insurance policies.

Here’s a look at average costs for whole life and universal life insurance.

There are two main differences between term life and the types of permanent life insurance described above:

Nonetheless, term life insurance is a very good choice for many families. Life insurance needs are often finite, allowing you to match the length of the term to your need for life insurance protection. For instance, someone age 35 might decide to provide $80,000 a year for 30 years with term life insurance.

Term life insurance is the most affordable type of life insurance, so you can get the most bang for your life insurance buck.

Later on, if you discover you need permanent coverage, many term life policies have a term life conversion option to convert the policy to a permanent one. The life insurer will tell you the policy choices at the time you convert. Your rate will be based on the age at which you convert and on your original health class. You won’t need a new life insurance medical exam.

As you weigh out your options, remember there is no one-size-fits-all solution. A financial advisor can help you figure out where life insurance fits into your overall financial plan, and a life insurance agent can help you zero in on the insurers that will give you the best price.

Related: Comparing term vs. whole life insurance

1 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

2 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial professional and refer to your individual whole life policy illustration for more information.

3 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

4 Permanent life insurance consists of two types: whole life and universal life. Cash value grows in a participating whole life policy through dividends, which are declared annually by the company's board of directors and are not guaranteed. Cash value grows in a universal life policy through credited interest and decreased insurance costs. The cash value of both policy types benefits when the policyholder pays an amount above the required premium.

5 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.

6 A Variable Universal Life (VUL) policy is considered both life insurance and a security and is sold with a prospectus. Premium and death benefit types are flexible. It’s crediting rate is based on the performance of the underlying investment options provided in the policy. There is no guaranteed interest rate. This type of policy may lapse due to low or negative performance of the underlying investment options, inadequate funding, and increasing cost of insurance rates. See your policy prospectus for more information.

7 An Indexed Universal Life (IUL) policy is not considered a security. Premium and death benefit types are flexible. It’s crediting rate is based on the performance of a stock index with a cap rate (i.e. 10%), a floor (i.e. 0%), and a participation rate (i.e., 100%). This type of universal life policy may lapse due to low or negative performance of the stock index, inadequate funding, and increasing cost of insurance rates.