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How Permanent Life Insurance Works

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Reviewed byJoel Ohman
Founder, CFP®https://res.cloudinary.com/quotellc/image/upload/insurance-site-images/truthaboutins-live/2020/03/joel-ohman.jpg

UPDATED: Mar 13, 2020

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“Permanent life insurance” is a type of whole life insurance.

It’s a life insurance policy designed to be active for the entire duration of the insured’s life, with a guaranteed benefit paid out when the insured dies.

Additionally, a permanent life insurance policy accrues cash value as it matures (as insurance premiums are paid).

The guaranteed benefit pay out, regardless of when the insured dies, contrasts term life insurance, which is a policy that specifies an exact benefit amount and is in-force for a pre-determined amount of time, such as 5, 10 or 30 years.

With term life insurance, if the insured does not die within the specified policy period, there is no death benefit.

Why Permanent Life Insurance?

As discussed above, the benefit of permanent life is the guarantee of benefits when the insured dies.

If permanent life insurance is purchased when the insured is relatively young and in good health, the premiums can be locked in for the life of the insured…typically at fairly reasonable rates.

The accrual of cash value, discussed above, is a benefit because the policy holder can obtain loans against that money.  However, the loan terms typically require payments to be made with interest.

Another option, known as universal life insurance, allows the insured to obtain loans from accrued cash value on their life insurance policy with little or no interest.

There are few financial instruments that allow a loan with these repayment terms.

Why Not Permanent Life Insurance?

The same aspects of permanent life insurance that make it a good insurance vehicle may make it unattractive depending on what stage of life the insured is in.

The costs of permanent life insurance policies are substantially higher than term life insurance.

You can expect to pay premiums as much as eight to ten times higher for permanent life versus term life insurance for the same amount of coverage.

So if you are in the market for cheap life insurance with a high death benefit, you will likely need to purchase a term life insurance policy.

And when it comes to the cash accrual of the permanent life insurance policy, many investment professionals agree that it may be better to place your money in an investment vehicle that grows at a much faster rate.

At the end of the day, your unique financial situation will likely dictate your final decision.

If you’re strapped for cash, permanent life insurance may not be the best option for you.

Term life insurance will offer similar, or even higher, death benefit amounts for a fraction of the cost of permanent life.

Just note the potential downside to a term life insurance policy is that the cost typically increases as the insured gets older, which is inevitable as each term expires.

Be sure to gather permanent life insurance quotes and consult a financial adviser and/or independent insurance agent before making your final decision.

Read more: What do life insurance companies test for?

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