Permanent life insurance is coverage with a cash value component intended to help keep the policy in force for one’s entire life (or permanently).
Many Types, Same Basic Idea
Permanent life insurance comes in many different varieties but the most common are:
- Whole Life
- Universal Life
- Variable Life
- Variable Universal Life
While each type has different features and benefits, the one consistent attribute across all permanent life insurance policies is that their cash value feature can allow them to last for the insured’s entire life.
You can imagine a permanent life insurance policy as a bucket:
- Premiums go in
- Insurance and policy costs come out
- The difference is added to the cash value
Three things usually happen throughout the life of the policy:
- Cash Value Grows. The cash value grows over time from the additions of the cash value portion of the premiums and returns earned on the cash value (how much depends on the type of policy.)
- Cost of Insurance Increases. The cost of insurance increases over time due to the insured getting older. In fact, most policies reach a point where the costs coming out are more than the premiums going in.
- Cash Value Eventually Gets Consumed. Policy costs coming out eventually exceed premiums going in. The resulting shortfalls are taken from the accumulated cash value.
If the policy is structured properly and the returns on the cash value are sufficient, this set up can allow the policy to stay in force for the insured’s entire life, effectively making it a permanent policy for them. Some policies even allow for the insured to eventually stop making payments.
Cash Value Key Points
Understanding that cash value is a an important attribute of permanent life insurance policies is central to understanding how these policies work. Here are some key points associated with cash value:
The cash value in a permanent life insurance policy doesn’t just sit there waiting to be used someday. Rather, it earns a return. Depending on the type of policy, its cash value can earn a pre-determined interest rate, a fluctuating interest rate, or returns based on investment performance.
Though the main intent of cash value is to keep the policy in force years in the future, most policies also allow the owner to use the funds for other purposes, either through withdrawals or loans. It’s important to understand that doing this can impact the policy’s ability to remain in force and withdrawals within a set number of years of the policy being issued may be subject to surrender charges.
Distribution if Cancelled
If a permanent policy is cancelled, the policy owner is entitled to receive the remaining cash value (after any applicable surrender charges and fees).