Permanent life insurance is life insurance that covers a person’s entire life, from the time he or she purchases the policy until the time of his or her death. This is in contrast to a term life insurance policy, which is in effect for a certain predetermined period of time, typically between five and 10 years. Assuming that the owner of a permanent life policy continues to make premium payments regularly and on time, the policy guarantees a payout when the policy-holder dies. Permanent life insurance is also known as whole life insurance and universal life insurance.
The owner of a permanent life insurance pays premiums at regular intervals, typically monthly, quarterly or annually, in exchange for a guaranteed death benefit for the beneficiary or beneficiaries named in the policy. The beneficiary is the person who will receive the life insurance payout upon the death of the policy-owner. With a permanent life insurance policy, the amount of the payout is the same whether the policy-owner dies the day after he or she purchases the policy or many years later.
One particular benefit of this type of insurance is that it has a cash value that can increase over time. This is because a small amount of the premium is deposited into an interest-bearing, tax-deferred bank account held by the insurance company. This allows the cash value of the permanent life policy to increase as long as the policy is in effect.
Permanent life insurance has another financial advantage, which is that the policy has a cash value that the policy-holder can access at any time. In essence, the owner of the policy has access to a cash loan for which he or she does not need to qualify and which often has a lower interest rate in comparison to that offered by banks and other lending institutions.
The advantages of permanent life insurance are balanced by the fact that it is more expensive than short-term life insurance policies. Another disadvantage is that it is not always easy to change the terms of the policy to accommodate life changes. Even so, for someone who plans to have an active life insurance policy for his or her entire life, it often is more financially prudent to invest in a permanent life policy, because the policy can accrue cash value and to pay dividends.
When purchasing any type of life insurance, it is essential to ensure that all terms and conditions are fully understood before the purchase is made. This is important because not all permanent life policies are the same, and many insurance companies offer different terms and conditions in addition to different premium prices and fees. For example, insurance policies differ in the extent of coverage provided, such as whether or not accidental death during participation in high-risk activities and sports is covered.