What is permanent life insurance, and how does it work?

Permanent life insurance is quite different from term life insurance. While both kinds of insurance pay a death benefit that is not subject to income taxes to your beneficiaries if you pass away, that's about where the similarities end.1 A term life contract only lasts for a specified amount of time – typically between five and 30 years; permanent life insurance policies last for your entire life as long as you pay your premiums.2 

There are exceptions, however. Some permanent policies have a maturity date based on your age, which means that the contract will end at that time, and you'll receive a lump sum of money. On newer contracts, the maturity date is usually at age 100 or more. Older policies sometimes mature at age 85.

There's another big difference: in addition to the death benefit, whole life and universal life policies can build tax-deferred cash value that can be used for future expenses, either as a loan or as a payout, for things such as helping cover college tuition, pay for medical emergencies, or to supplement retirement income.3,4  

The actual amounts built up in your cash value will vary based on the specific life insurance company, type of permanent policy, and the details of your specific contract. In the first few years of a policy, most growth typically comes from your premium contributions. But after a few years of tax-advantaged compounding it can grow to a sizable sum; after that, most growth is likely to come from interest income.

What are the different types of permanent life insurance?

Permanent life insurance policies fall into two primary categories: whole life and universal life. While both provide lifetime coverage and have a cash value component, they differ in two respects: flexibility and guarantees.

Whole life insurance is designed for people who want guarantees. 

  • Whole life has a guaranteed premium. With a whole life insurance policy, you know what your premium is, and it never changes. As long as you pay the premium, you continue to have coverage.
  • Whole life provides a guaranteed cash value. Your whole life insurance policy builds cash value over the life of the contract, and you know that it will be worth at least a predetermined amount if you were to withdraw cash. Your policy's cash account will grow at a rate that is guaranteed by your insurance company. If you get whole life from a "mutual" insurer (like Guardian), you may also receive additional non-guaranteed dividend payments.5 In time, your policy could actually be worth more than the predetermined amount - but it will never be less.
  • Whole life costs more than universal life. 

Universal life insurance is designed for people who prefer flexibility. 

  • The policy account value and is based on the current interest rate, which can go up and down over the course of coverage.
  • Universal coverage provides more flexibility in paying your premiums. If you are in a situation where paying your premiums becomes problematic, you can reduce or even stop paying your premiums and let the cost come out of your policy's cash value. However, if the policy's cash value becomes too low, your policy may lapse.6,7
  • Universal life insurance may allow you to change the amount of your death benefit.
  • Unlike whole life insurance, you may not receive dividends on universal life policies, even with a mutual insurer. 
  • Universal life coverage is typically more affordable than comparable whole life policies.

There are different variations on universal life policies that can provide other advantages, such as the potential for more growth in your cash account.

  • Indexed universal life bases cash value accrual on the performance of an index with variable returns, like the S&P 500 Index. These provide caps for both the minimum and maximum amounts earned.8,9
  • Variable universal life provides the option of tying cash value to grouped investments, similar to mutual funds. It allows the policyholder to choose how much to allocate in each investment option.10 
  • Guaranteed universal life (GUL) is designed to provide permanent insurance with much lower payments by providing little or no cash or surrender value. These policies largely resemble term life insurance, except they do not have to be renewed. 
  • Survivorship universal life insures two lives, such as spouses, and pays the death benefit to their heirs upon the second person's death.  

How is permanent life insurance different from term life insurance?

Permanent insurance has many valuable advantages, as well as a few disadvantages.

  • Permanent insurance does not expire as long as you pay the premiums, so you don't have to worry about losing your coverage if your health deteriorates. Term life only provides coverage for a specified amount of time; then, you have to apply for another policy, typically at a higher rate.
  • With permanent whole life, the monthly premium never increases. Term life insurance provides coverage for a set number of years, then must be renewed to continue protection. At the time of the renewal, the rate will typically go up. How much the rate increases is based on several factors, including your age, your smoking status, your health, and the length of coverage time. And even though premiums can vary in a universal life policy, your health rating will always stay the same. That's why buying a permanent life insurance policy while you're young, healthy (and ideally, a nonsmoker) can be a valuable idea. 
  • Permanent insurance builds cash value that can be used for future expenses, such as a down payment on a home, supplemental retirement income, or financial emergencies. 
  • Permanent insurance allows you to borrow against the policy and the loan is tax-favored provided you keep the policy in place. Unlike traditional loans, there's no credit check required. You also don't have to pay the money back should you choose not to.
  • Some permanent policies let you add a term rider, meaning you can add term life insurance when your family's financial needs are greater.11 For example, you may want to add a term rider when your children are young, but you may not necessarily need that additional insurance once they are grown. 
  • Some term insurance (convertible term) allows you to convert to permanent life insurance later on. This can be especially valuable if you are diagnosed with a serious health issue because the permanent conversion rates would be based on your health rating when you took out your term policy, not your new health condition. 
  • Universal life insurance contracts may provide you with a choice on how long you pay your premium. If you choose to stop paying your premiums, the premium will come out of your policy's cash value, if present. 
  • Permanent insurance is typically more expensive than term. 

Comparison of Universal life, whole life, and term life

 

Universal Life Insurance

Whole Life 

Insurance

Term Life 

Insurance

Coverage period

Permanent life-long protection

Permanent life-long protection

Limited to a specific term (typically 10-30 years)

Builds cash value

Standard – Yes

Indexed – Yes

Variable – Yes

Guaranteed – No

Yes

No

Cost for a given death benefit

More expensive than term; but often less than whole life

More expensive than term

Less expensive than whole life or universal life

Premiums

Can vary

Typically fixed

Typically fixed

Income tax-free death benefit

Yes, typically

Yes, typically

Yes, typically

Investment options

Standard – No

Indexed – Yes

Variable – Yes

Guaranteed – NA

Limited, if any

NA

Primary uses

Income protection; tax-advantaged wealth preservation and transfer

Income protection; tax-deferred asset accumulation; tax-advantaged wealth preservation and transfer

Income protection and replacement 

How much does permanent insurance cost?

Due to permanent insurance's added benefits, the cost is typically higher than the same amount of term insurance. And whole life tends to cost more than universal life. 

Several factors impact the cost of life insurance, including age, gender, smoking, overall health, and the amount of coverage. Permanent life policies are best when taken out at a young age because the premium is lower and won't increase. Plus, there is more time to build up cash value.

Your specific policy amount will vary, but the following chart based on 2021 rates for health nonsmokers can give you an idea of the cost differences. As you can see, Universal life averages around five times the cost of term insurance for the same coverage amount. Whole life averages approximately ten times the cost of a comparable term policy. 

Gender/

Age/

Policy Value

Term1

(monthly premium)

Universal2

(monthly premium)

Whole2

(monthly premium)

Male, Age 30

 

 

 

$500,000

$28

$195

$300

$1 million

$47

$341

$593

Female Age 30

 

 

 

$500,000

$22

$135

$266

$1 million

$36

$297

$526

Male. Age 40

 

 

 

$500,000

$39

$272

$451

$1 Million

$69

$895

$702

Female, Age 40

 

 

 

$500,000

$33

$236

$402

$1 Million

$57

$427

$702

Male, Age 50

 

 

 

$500,000

$93

$410

$702

$1 Million

$173

$759

$1398

Female, Age 50

 

 

 

$500,000

$71

$355

$626

$1 Million

$128

$674

$1247

1 Source: https://www.policygenius.com/life-insurance/affordable-life-insurance/ Rates valid as of 1/11/2021

2 Source for all rates: Quotacy. Average rates are per year for a policy from the top three carriers for nonsmokers. 

https://www.nerdwallet.com/article/insurance/universal-life-insurance

Talk to a life insurance professional about your needs

Life insurance costs go up with age, so there may be no better time than the present to look into getting a policy. Permanent life insurance can be a powerful financial resource that not only helps protect your family and lifestyle but builds cash value for needs later in life. Your situation is unique, and professional guidance can be helpful to find a permanent life contract designed for the specific needs of you and your loved ones. So, it helps to discuss your situation with a financial professional who has helped others get whole life insurance coverage. If you need help finding such a person, Guardian can connect you to a financial representative who can help. 

Frequently asked questions about permanent life insurance

Is permanent life insurance the same as whole life insurance?

Whole life is a specific type of permanent life insurance. Whole life gives you death benefit coverage for life as long as you keep your premium payment up-to-date or until you reach your policy's maturity date (typically at age 100 or more). Universal life is another type of permanent insurance.

Who offers the best permanent life insurance?

There is no one-size-fits-all life insurance because everyone's needs are unique. Various permanent life insurance policies offer different features, benefits, and coverage options. The best permanent life insurance option for you is one that will provide the protection you want for your family at a price that fits your budget. 

What is a permanent life insurance plan?

A permanent life insurance "plan" is more accurately called a policy. It's a contract with a life insurance company to provide protection throughout your entire life, not just for a specified number of years. Most permanent life policies also build cash value, which can be used for a policy loan, or taken out to help pay for future expenses. Death benefits paid to beneficiaries may also help offset estate taxes, but you should consult with your financial professional.

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Disclaimer

1 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.

2 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.

3 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 representative and refer to your individual whole life policy illustration for more information.

4 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.

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

6 A Fixed Universal Life Insurance (UL) policy provides a flexible premium, choice of death benefit options, and a guaranteed crediting rate (i.e. 2%). Policy growth is based on adequate funding, increasing crediting rates, and if costs of insurance is lower than expected. If any of the three factors just mentioned are lower than expected (policy funding and crediting rates), and/or higher than expected (cost of insurance), the policy may lapse.

7 Universal Life Insurance may lapse prematurely due to inadequate funding (low or no premium), increase in cost of insurance rates as the insured grows older, and a low interest crediting rate. This does not apply to universal life policies which have a secondary guarantee, but if the secondary guarantee requirements are not met the policy will most likely lapse.

8 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.

9 S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market. Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results.

10 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.

11 Riders may incur an additional cost or premium. Riders may not be available in all states.

2021-122816  20230930