Young woman with a chalkboard illustration of a tree that grows money, symbolizing the cash value component of permanent life insurance

Permanent life insurance covers you for the rest of your life — that’s what makes it different from term life insurance, which only covers you for a limited time. You might also hear it referred to as “cash value” life insurance. That’s because one of its special features is a cash value account that grows with interest over time. That’s something else you can’t get with a term life policy.

You might be wondering: is permanent life insurance worth it?

The only person who can answer that question is you. Because life insurance is priced based on your individual characteristics and health history – and because there are different types of permanent policies – there’s no single best permanent life insurance policy that works for everyone.

If you’re just looking for something to cover final burial expenses, you’ll need a different policy than someone looking for tax advantages who wants to sock away tens of thousands of dollars in their policy. That’s why I recommend spending a few minutes talking to an agent. You don’t have to be an expert, but it helps a lot to talk to one!

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How Does Permanent Life Insurance Work?

When you apply for a permanent policy, the insurer will offer you a rate based on your age, sex, health, and lifestyle. They need to know these things to estimate how much of a risk it will be to insure you. Some policies require medical exams, while others don’t – but be prepared to pay a little more for the convenience of skipping that exam. While we’re on the subject of cost, permanent policies never expire, so they cost significantly more than term life policies. However, you have the peace of mind of knowing you have lifelong coverage and your loved ones will be taken care of no matter when you pass away.

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Another benefit of permanent life insurance is the cash value. A portion of all your premium payments gets put in your "cash value" account. This account grows, with interest, over time. How much interest depends on the type of policy you bought – they each have different rates of interest applied. As long as you keep your policy, that cash value continues to grow tax deferred.

When you pass away, your beneficiary (or beneficiaries) will need to let the life insurance company know and file a claim. Once they submit the claim and any documentation (usually a death certificate), the company will pay them the full total of the death benefit, income tax free.

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Types of Permanent Life Insurance

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  • Whole Life Insurance. This is the simplest type of permanent life insurance. It offers a flat rate of interest for your cash value, set at the time you buy your policy. That rate won’t change, no matter how interest rates fluctuate later. It’s usually a small percentage – under 5%, for example. It’s not designed to create or accumulate wealth, unlike some other types of permanent policies. When you see or hear ads for burial insurance or final expense insurance, they’re usually referring to a whole life insurance policy.
  • Universal Life Insurance. This type offers the greatest flexibility. You can change your payment amount and payment schedule. As long as you meet stated minimum amounts to keep the policy funded, you can decide how much you want to pay when. It also offers a set rate of interest for your cash value growth.
  • Indexed Universal Life Insurance. This type of coverage - often referred to as "IUL" - lets you tie your cash value growth to the performance of a market index (like the S&P 500). You’re not actually invested in the market – you’re simply using its performance as a benchmark to see how much interest the insurance company will credit to your account. If the index does well, you’ll earn more interest. If it does poorly, you’ll either earn nothing or a very small token rate of interest. You won’t lose any money, though, since your cash value is not actually invested in that index.
  • Variable Universal Life Insurance. Like regular universal life, this policy type offers flexibility in what you pay and when you pay it. But unlike any other type of coverage, VUL lets you invest your cash value in accounts that operate like mutual funds. This means your cash value accounts can be invested in bonds, stocks, and other funds, known as subaccounts. The cash value will grow or decline based on the performance of your subaccounts. This gives you the chance to grow your cash value faster, but it also means you run some risk of loss.

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How to Access & Use Your Cash Value

You can use your cash value to pay for healthcare expenses, remodel a house, start a business, or put a child through college (to name just a few examples). There are no rules or limitations on what you can do with that money. In fact, many clients use their cash value to pay their policy premiums later in life.

Most of the time, that cash value is a “use it or lose it” benefit. If it’s not spent by the time you pass away, it will revert to the insurance company. Recently, more insurers have made the move to let your cash value be distributed to your beneficiaries along with the death benefit. Some, however, will charge more for this option and you may need to select it at the time you buy your policy.

You can access the cash value your account builds during your lifetime in several ways:

    Woman holding money withdrawn from her cash value permanent life insurance account
  • Policy loan. You can borrow cash value from the insurer at a very low interest rate. Although this is technically a loan, you don’t have to repay it if you don’t want to. If, when you pass away, you still have unpaid policy loans, the insurer will subtract what you owe from the amount your beneficiary receives. For example, let’s say you borrow $30,000 in cash value from your insurer and didn’t pay it back. If your policy’s face value was $200,000, the insurer would subtract $30,000 from that amount, paying your beneficiary $170,000 when you pass away.
  • Withdrawal. You can also just withdraw money from your cash value. There’s usually a fee for doing this. Any fees will be spelled out in your policy contract when you buy the policy. Or you can always call your agent with questions.
  • Surrender the policy. Although I don’t recommend this, it is possible to surrender (cancel) your policy. If you do this, you won’t have any death benefit coverage and your loved ones won’t get paid anything when you pass away. But if unforeseen circumstances happen and you do surrender a permanent policy, you’ll be entitled to receive the cash value, minus any loans and surrender charge.

➡️ Want to learn more? I can tell you how these policy types are different and help you decide which is right for you. Click the button below to schedule a quick call!

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How to Shop for a Permanent Life Insurance Policy

The easiest way to shop for a permanent life policy is to talk to an agent. Because – let’s face it – you’re probably not an insurance expert. You don’t know what you don’t know. For example, did you know some whole life insurance policies pay dividends? Yes, you can actually get paid for having a policy!

You can shop around for quotes online, but to finalize your purchase, it’s best to talk to an expert. Here are a few questions to ask as you shop around and get quotes:

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  • Is the insurer financially strong? Ask your agent or financial advisor about the financial ratings before buying from any insurer. You want to make sure outside parties have evaluated that company’s financial preparedness so you can be confident they’ll be around in a number of years when your loved ones need to make a claim.
  • Does the insurer have good ratings from customers? Financial ratings are important, but so are the experiences of regular people. Is this insurer easy to communicate with? Do they respond to questions in a timely fashion? You can Google customer reviews online, or you can ask your agent about his or her personal experience with an insurer.
  • What riders (add-ons) are available for this policy? Some policies have add-ons that can provide extra products and services. Some riders are free, while others cost extra. Examples include a long term care rider or chronic illness rider, allowing you to dip into the death benefit if you need it to help pay for care. Other riders can cover your children, or halt payments if you experience a disability and can’t work.
  • Does the policy pay dividends? Some insurers are mutual companies, which mean they are actually owned by policyholders (not shareholders). If this is the case, they may pay dividends when the company has a profitable year. Examples include MassMutual, Northwest Mutual, and Mutual of Omaha.
  • Does the insurer offer limited payments? Some insurers have an accelerated payment plan so you can pay off your policy faster. This can be helpful if you anticipate being on a fixed income later in life, but have a full income now.

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