What Is a Permanent Life Insurance Policy?

Lynda Taylor is an assistant director of Insurance Solutions Development at Northwestern Mutual.

When you help to support a family, you’re likely to think about how your family would be taken care of if you were to die. That’s what life insurance is for. But life insurance comes in many varieties.

Permanent life insurance, which includes whole life insurance, is one option on the table, and it’s exactly what its name suggests: permanent. If the policy is in place when you die, it will pay a death benefit, whether you live to be 65 or 105. That’s what makes it different from the other main type of policy, term life insurance. Term will expire, usually without being worth a dime.

We’ll help you understand what permanent life insurance is and how it works so you can decide whether it has a place in your financial plan.

What are the different types of permanent life insurance policies?

Depending on what you’re looking for, you may choose a different type of permanent life insurance policy. Here are the main types of permanent life insurance:

Whole life

Whole life insurance is one of the most common types of permanent life insurance people buy. It is a policy that covers you for your whole life. Your premiums won’t change (even as your age and health do), and you’ll have the same coverage in place as long as you pay those premiums. You’ll also earn cash value on your policy, giving you another financial tool to use as you work toward your goals.

Universal life

With a universal life policy, you’ll still have a death benefit that covers you for life and your policy will accumulate cash value. But with this type of policy, you have the flexibility to adjust your premiums in any given year or raise (within limits) and lower your death benefit amount. Though the ability to customize can be helpful, it’s important to work with a financial advisor to make sure your changes align with your overall needs.

Variable universal life

Variable universal life insurance works like universal life insurance with one added benefit—you have more flexibility with how your cash value is managed. You can invest your cash value in sub-accounts that are tied to the market, allowing it to grow more than it might with other permanent life insurance policies. However, because the sub-accounts are tied to the market, the value of your cash value could decline, too.

How does permanent life insurance work?

Permanent life insurance is very flexible, which also makes it a bit complicated. Let’s take a fairly simple whole life insurance policy to explain how it works.

Determine how much permanent life insurance do you need

First, you’ll figure out how much of a death benefit you need—your financial advisor can help you think this through—then apply for that amount of coverage. (As part of the application, you’ll need to answer some questions about your health.)

Then, you’ll figure out how long you’d like to be paying your premiums. It’s like a home loan, where you might choose a 15- or 30-year loan. With life insurance you typically have many options. You could choose to pay until you reach a certain age, like 65 or 100, or for a certain number of years.

Just like with a home loan, the shorter the duration, the more you’ll owe each year for the same amount of coverage. Whole life insurance is usually like a fixed-rate mortgage—the premiums never change unless you select a policy where that’s possible.

Universal life offers more flexibility on the timing and amount of premium payments.

Understand your permanent life insurance death benefits and dividends

Once the policy is in effect, if you die, the company will pay your beneficiaries the full death benefit. But let’s assume that you live for a long time. Your policy will accumulate cash value over time that you’re able to access for any reason (however, doing so will reduce the death benefit). Cash value can be valuable part of your financial plan—it’s a flexible tool that can support many different financial goals you have.

The most common way to access your cash value is to take a loan against it. It’s like a home equity loan. You could take the loan directly from your insurance company or you could use the policy as collateral for a bank loan. One thing to consider if you do this: If your loan is from the insurance company, the company will deduct the loan balance from the death benefit. Or, you always have the option to repay the loan.

Depending on your policy, you could also permanently reduce your death benefit someday in exchange for a portion of your cash value. You would lose your death benefit though, and doing this can have tax implications. So if you go this route, it’s best to work with a financial advisor or professional.

Even though they aren’t guaranteed, many insurance companies also pay dividends on whole life policies, which can allow your cash value to grow more quickly and may also increase your death benefit if you reinvest them in your policy. You could also choose to use your dividends to pay your premiums—meaning you may not have to pay as much each year. It’s even possible that at some point, you may not have to pay anything at all. But that also means you won’t accumulate as much cash value.

Universal Life policies differ from whole life in the amount of flexibility they offer. Universal Life policies do not pay dividends, do not have fixed premiums or have a guaranteed cash value. Instead, they offer flexible premiums and monthly charges deducted from the cash value. These charges are based on the difference between the death benefit and cash value as well as the health of the insured at issue and their current age.

Who should get permanent life insurance?

Anyone can benefit from a permanent life insurance policy—no matter the age. In fact, there are many benefits to purchasing a life insurance policy on your children. Keep in mind that the younger and healthier you are, the lower your premiums are likely to be. So, getting a permanent policy early on could lock in lower rates for the rest of your or your children’s lives.

Because permanent life insurance is more expensive than a term policy for the same death benefit, often people will buy a mix of term and permanent life insurance. Some term policies will also allow you to convert them to a permanent policy in the future without going through underwriting.

If you’re interested in a death benefit that won’t expire and want the ability to accumulate cash value, you should consider permanent life insurance. Your financial advisor can help you find the right policy for you and help you understand how it fits into your broader financial plan.

Loans taken against a life insurance policy can have adverse effects if not managed properly. Policy loans and automatic premium loans, including any accrued interest, must be repaid in cash or from policy values upon surrender, lapse or the death of the insured. Repayment of loans from policy values upon surrender or lapse can trigger a potentially significant tax liability and there may be little or no cash value remaining in the policy to pay the tax. The policy will lapse if loans become equal to the cash value while the policy is in force and additional cash payments are not made.