The Benefits and Drawbacks of Permanent Life Insurance

Life insurance can be thought of as an agreement between you and an insurance company, in which you agree to pay the insurance company a certain amount of money over time and they agree that if you die they will give your family more money than you paid.

Permanent life insurance (also known as whole life insurance) is insurance that lasts for your entire life and does not expire, which means that your family is guaranteed to receive money from the insurance company when you die, whenever that happens. In addition, permanent insurance policies usually have some investment element, which lets you invest some of the money from the policy or borrow money from the policy.

Permanent insurance basics

Like term insurance, permanent insurance will pay your family or other beneficiaries a certain amount of money if you should die, known as a “death benefit.” In addition to a death benefit, permanent insurance policies usually have a cash value (which can be thought of as a savings account) that increases over time on a tax-deferred basis, which you can invest and borrow against. Loans taken out against the cash value of the policy are on a tax-free basis, but usually accumulate interest and reduce the death benefit.

Cashing out a permanent policy

Permanent insurance policies usually offer the ability to cash in the policy for the cash value amount of the policy, which grows over time. This can provide you with a chunk of cash when you need it, though you will no longer own the insurance.

Permanent policy premiums

The premiums (the amount of money) that you pay for your life insurance are usually payments made every year, and the premium is usually guaranteed for the duration of the insurance (meaning that the premium amount will not increase over time). While the premiums for permanent life insurance policies are higher than the premiums for term policies, the fact that permanent policies include savings and investment options may make permanent insurance more useful for some people, and so the extra cost might be worth it.

For help figuring out how much life insurance you need, see our article How Much Life Insurance Do You Need?

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