Permanent Life

Understanding Permanent Life Insurance

Unlike term life insurance, which promises the payment of a specified death benefit for a specific period of years, permanent life insurance lasts the lifetime of the insured (hence, the name) unless nonpayment of premiums causes the policy to lapse.

Permanent life insurance premiums go toward both maintaining the policy’s death benefit and allowing the policy to build cash value. The policy owner can borrow funds against that cash value or, in some instances, withdraw cash from it outright to help meet needs such as paying for a child’s college education or covering medical expenses.

There is often a waiting period after purchasing a permanent life policy during which borrowing against the savings portion is not permitted. This allows sufficient cash to accumulate in the fund. If the total unpaid interest on a loan, plus the outstanding loan balance, exceeds the amount of a policy’s cash value, the insurance policy and all coverage will terminate.

Permanent life insurance policies enjoy favorable tax treatment. The cash value growth is generally on a tax-deferred basis, meaning that the policyholder pays no taxes on any earnings as long as the policy remains active. As long as certain premium limits are adhered to, money can also be taken out of the policy without taxes because policy loans are usually not considered taxable income. Generally, withdrawals up to the total of premiums paid can be taken without being taxed.