What Is a Permanent Life Insurance Policy?

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.

How is permanent life insurance different from term life insurance?

Think of the difference between term life and permanent life insurance like renting vs. buying a home. Term life insurance is like renting. You pay rent each month, and when your lease is up, you stop paying, move out and walk away with nothing financially.

With term, you pay premiums to cover yourself for a certain period. When the term is over, you won’t have to pay your premiums, but there will be no death benefit for your beneficiaries.

Permanent life insurance is like buying a home. With each mortgage payment, you build equity in your home until you own it outright. Whether you sell the home or leave it behind for your family, the home is an asset you own.

When you pay the premiums on your permanent life insurance, you’re building value in your policy while you’re still alive. Eventually your insurance will become a valuable asset that you own. That’s why permanent life insurance is more expensive than a similar term policy.

What are the different types of permanent life insurance policies?

Depending on what you’re looking for, you may choose from different types of permanent life insurance. 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’s 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. And that cash value generally grows tax-deferred.

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 match your overall needs.

Variable universal life

Variable universal life insurance has the flexibility of universal life insurance with the option to invest your cash value. You can invest your cash value in subaccounts that are tied to the market, allowing it to grow more than it might with other permanent life insurance policies. However, because the subaccounts 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 say you talked with your financial advisor and narrowed down the options to whole life insurance. We’ll explain the basics of how it works.

Understand what affects the cost

Your policy’s cost will depend on several factors, including the amount of coverage, what benefits you choose, the length of time you’ll pay, and your age and health. First, you’ll figure out how much of a death benefit you need—your financial advisor can help you quantify this. Considerations include your age, income and goals along with how much debt you have. A good general rule is 10 to 15 times your salary.

You’ll also 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. (Universal life offers more flexibility on the timing and amount of premium payments.)

Review the death benefit and cash value

Now let’s say you applied for coverage, including sharing some basic information about your health. Once the policy is in effect, the company will pay your beneficiaries the full death benefit when you die. The beneficiaries will file a claim, and they’ll usually get some options for taking the money: as a payout into an investment account, as scheduled payments or simply as a lump sum.

But let’s assume that you live for many more years. Your policy will accumulate cash value (tax-deferred) over time that you’re able to access for any reason (however, doing so will reduce the death benefit). This cash value can be an important part of your financial plan—it’s a flexible tool that can support many different financial goals you have.

A common way to access your cash value is to take a loan against your policy. 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 if it’s not paid back (or you die before the loan is repaid).

You could also take a portion of your cash value out of the policy, which would permanently reduce your death benefit, and it can have tax implications. If you don’t take all of your cash value out, the policy will still have a death benefit, just reduced proportionately for what came out of it. If you go this route, it’s best to work with a financial advisor or professional.

Learn about potential dividends

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 don’t pay dividends, and they don’t have fixed premiums or a guaranteed cash value. Instead, they offer flexible premiums and monthly charges deducted from the cash value.

Who should get permanent life insurance?

Almost anyone can benefit from a permanent life insurance policy, but here are some situations where it’s especially beneficial.

Families planning a legacy¹

Permanent life insurance may be a good fit for people who want to leave behind money for their loved ones or a charity. That’s because it can provide coverage for an entire lifetime (as long as premiums are paid and the policy remains in force).

The beneficiary gets a death benefit—generally tax-free—to use any way they wish. Permanent life insurance can be appropriate at various income levels and may be especially useful for families with significant net worth. When properly structured—for example, as part of an estate plan—it can help provide liquidity to address estate taxes and other settlement costs, potentially reducing the need to sell other assets.

Budget-conscious planners seeking stability

And whole life insurance is a good tool for people who want a predictable cost. Remember that whole life policies typically have fixed premiums, meaning the payment amount doesn't change over time. This predictability is valuable for long-term financial planning, allowing families to budget consistently for this crucial protection. Along the way, the policy accrues the cash value discussed above.

Stability also comes from the policy’s growth. Your cash value is guaranteed to grow regardless of market ups and downs.

Parents looking to jump-start a child’s financial future

Parents often get permanent life insurance to insure a child. Many policies include a benefit that can guarantee your child the ability to purchase permanent life insurance as an adult at their original underwriting class. Said differently, this locks in the child’s future insurability such that any changes in health over their lifetime will not affect their ability to get life insurance. In addition, the cash value will grow over their lifetime to be an asset that can be used for any reason or to keep as death benefit and have it continue to grow.

Talk with a financial advisor

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 Northwestern Mutual financial advisor can help you think through the pros and cons. They will ask deep questions to get to know you and then help ensure you have a financial plan designed to grow and protect your money, helping you reach your financial goals.

The primary purpose of permanent life insurance is to provide a death benefit. Your policy's cash value typically becomes a useful source of funds only after several years of premium payments, which allows the cash value to build up. There are different ways to use your policy’s cash value. These different methods have advantages and disadvantages. There may also be tax implications. Whether you take your money in the form of a surrender, withdrawal, or loan, the policy’s value and death benefit will be reduced. Taking money out will also affect dividends paid on the policy, if those are available. Any money withdrawn from the policy, beyond what you paid in cumulative premiums, will be taxable. Loans are not taxable when they are taken, and can have adverse effects if not managed properly. Policy loans and automatic premium loans, including any accrued interest, must be repaid in cash or cash values when the policy terminates, or the insured person dies. Repaying loans from cash values (other than death benefit funds) can trigger a significant tax event, and there may be little or no cash value left to pay the tax. If loans and accrued interest reach the amount of your cash value, additional cash payments are necessary or the policy will terminate. Policyowners should consult with their tax advisors about the impact of using their policy’s cash value.