Permanent life insurance stays in force for your entire life, as long as you pay the premiums, and builds cash value you can borrow against or withdraw

Unlike term life insurance, which covers you for a set number of years (10, 20, or 30 years), permanent life insurance does not expire. You pay premiums throughout your life, and the death benefit pays out whenever you die — whether that is next year or 50 years from now. The trade-off is that permanent policies cost significantly more than term, often 5 to 15 times as much for the same death benefit amount.

Permanent policies also build cash value — a savings component that grows tax-deferred over time. You can borrow against this cash value, withdraw from it, or use it to pay premiums if you hit financial hardship. That cash value belongs to you; if you cancel the policy, you receive the surrender value (the cash value minus any surrender charges).

There are three main types of permanent life insurance: whole life, universal life, and variable universal life. Each has different rules for how premiums are set, how cash value grows, and what flexibility you have to adjust coverage.

Key Takeaways

  • Permanent life insurance covers you for life and builds cash value, but costs far more than term insurance for the same death benefit.
  • You can borrow against the cash value or withdraw from it, though doing so reduces the death benefit unless you repay the loan.
  • Whole life has fixed premiums and may provide cash value growth; universal life and variable universal life offer lower premiums but less certainty.
  • Permanent insurance makes sense if you have lifelong dependents, want to leave an inheritance, or need coverage you cannot outlive.
  • Most people under 60 with temporary financial obligations are better served by term insurance and separate savings.

How cash value works and what you can do with it

When you pay a permanent life insurance premium, part of it goes toward the death benefit and part goes into the cash value account. This cash value grows over time — either at a may provide rate (whole life) or at a rate tied to market performance or interest rates (universal and variable universal life). You do not pay income tax on this growth as long as the money stays in the policy.

You can access this cash value in three ways. First, you can borrow against it at a rate set by the insurance company (typically 5 to 8 percent). The loan does not require a credit check or income verification. Second, you can withdraw money directly from the cash value, though withdrawals above your basis (the premiums you paid in) are taxed as income. Third, you can surrender the policy and receive the cash value minus any surrender charges — fees that typically decline over 10 to 20 years and eventually disappear.

If you borrow against the cash value and do not repay the loan, the outstanding balance plus interest is subtracted from the death benefit when you die. If the loan grows large enough, it can consume the entire cash value and cause the policy to lapse, leaving no death benefit for your beneficiaries.

Whole life insurance: fixed cost, may provide growth

Whole life is the most straightforward permanent policy. Your premium is locked in at purchase and never changes. The insurance company guarantees a minimum rate of cash value growth, typically 2 to 4 percent per year. Many whole life policies also pay dividends — annual payments based on the company's investment performance and claims experience. You can use dividends to buy additional coverage, reduce your premium, or take them as cash.

The predictability comes at a price: whole life premiums are the highest of any permanent policy type. A 40-year-old in good health might pay $200 to $400 per month for a $500,000 death benefit, compared to $30 to $50 per month for a 20-year term policy with the same benefit.

Whole life makes sense if you want certainty — you know exactly what you will pay and what your cash value will be at any point. It also works well if you plan to keep the policy for decades and want the discipline of a fixed payment that does not change.

Universal life insurance: flexible premiums, variable growth

Universal life (UL) policies offer more flexibility than whole life. Your premium is not locked in; instead, the insurance company deducts the cost of insurance and administrative fees from your cash value each month. As long as the cash value covers these costs, your policy stays in force. This means you can pay more than the minimum premium in good years and less (or nothing) in lean years, as long as the cash value balance allows it.

Cash value in a UL policy typically grows at a rate tied to current interest rates or a market index, rather than a may provide minimum. When interest rates are high, your cash value grows faster; when rates drop, growth slows. The insurance company guarantees a minimum rate (often 2 percent), but actual returns may be lower than whole life if market conditions are poor.

The trade-off is risk. If interest rates stay low for years, your cash value may not grow as expected, and you may need to pay higher premiums to keep the policy in force. Some UL policyholders have faced premium increases decades into ownership when cash value did not grow as projected.

Variable universal life: market-linked growth with higher risk

Variable universal life (VUL) policies let you direct your cash value into investment subaccounts — similar to mutual funds — that track stocks, bonds, or other assets. If your investments perform well, your cash value grows faster than in a UL policy. If they perform poorly, your cash value shrinks and you may need to pay higher premiums to maintain coverage.

VUL policies require more active management than whole life or standard UL. You choose which subaccounts to invest in, and you can shift money between them. This flexibility appeals to investors who want control, but it also means you bear the investment risk — the insurance company does not may provide any minimum cash value or death benefit (though some VUL policies offer optional guarantees for an extra fee).

VUL is the least common type of permanent insurance and is generally suited only to people with investment knowledge and a long time horizon. If you are not comfortable managing investments, whole life or standard UL are simpler choices.

When permanent life insurance makes financial sense

Permanent insurance is most useful when you have a lifelong need for coverage. Examples include: a parent with a disabled adult child who will need financial support indefinitely; a business owner who wants to fund a buy-sell agreement (a contract that lets surviving partners buy out the deceased owner's share); or someone with substantial assets who wants to leave a tax-efficient inheritance to heirs.

Permanent insurance also works for people in their 50s or 60s who still have dependents and cannot afford the premiums on a term policy long enough to cover them until death. A 60-year-old cannot buy a 40-year term policy, but a permanent policy will cover them for life.

For most people under 60 with temporary financial obligations — a mortgage, young children, student loans — term insurance is a better choice. Term is cheaper, easier to understand, and lets you invest the premium difference in a savings account or retirement plan. Once your obligations end, you no longer need coverage and your term policy expires. With permanent insurance, you are paying for coverage you may not need in 20 or 30 years.

Comparing permanent insurance to term insurance and other savings

A 35-year-old in good health can buy a 30-year term policy for a $1 million death benefit for roughly $40 to $60 per month. The same person would pay $300 to $500 per month for a whole life policy with the same benefit. Over 30 years, that is a difference of $86,400 to $162,000 in premiums.

If that person invested the premium difference ($240 to $440 per month) in a tax-advantaged retirement account earning 6 percent annually, they would accumulate $200,000 to $350,000 by age 65. At that point, their term policy expires but they have substantial savings. With permanent insurance, they have paid far more in premiums but own a policy that will eventually pay out a death benefit.

The choice depends on your goals. If you want to may provide a death benefit for your heirs regardless of when you die, permanent insurance delivers that. If you want to protect your family during their dependent years and build wealth for yourself, term insurance plus separate savings often works better.

Frequently Asked Questions

Can I cancel a permanent life insurance policy and get my money back?

Yes. If you surrender the policy, you receive the cash value minus any surrender charges. Surrender charges typically start at 5 to 10 percent of the cash value and decline by 1 percent per year, disappearing after 10 to 20 years. If you have owned the policy for many years, you may receive most or all of the cash value. Withdrawals and loans against the cash value are also possible without canceling the policy.

What happens if I stop paying premiums on a permanent policy?

With whole life, if you stop paying, the insurance company will use your cash value to pay premiums automatically. Your coverage continues, but the death benefit and cash value both decline over time. With universal life, once the cash value is depleted, the policy lapses and you lose coverage. Some policies offer a grace period of 30 to 60 days to pay a missed premium before lapsing.

Is the death benefit from permanent life insurance taxable?

No. The death benefit paid to your beneficiaries is not subject to federal income tax. However, if your total estate (including the death benefit) exceeds the federal estate tax exemption — currently over $13 million for individuals — your heirs may owe federal estate tax. State estate taxes may apply at lower thresholds in some states.

Can I borrow from my permanent policy if I have bad credit?

Yes. Policy loans do not require a credit check or income verification. The insurance company lends you money against your cash value at a rate set in your policy contract, typically 5 to 8 percent. You can use the money for any reason, and you repay it on your own schedule. If you do not repay, the loan balance is deducted from the death benefit.

Should I buy permanent life insurance if I am young and healthy?

Probably not, unless you have a specific long-term need. Young people have the lowest term insurance rates, so a 30-year-old can lock in cheap coverage for decades. Permanent insurance makes more sense later in life when term premiums become expensive or when you develop a lifelong coverage need.