What is Permanent Life Insurance and How Does it Work?

Life insurance policies offer a reliable and protected shield for your family, even in your absence. One such reliable and significant policy is Permanent Life Insurance, which covers the insured’s entire life, even if you live up to 100 years, as long as the premiums are paid.

To learn more in-depth about permanent life insurance policy, continue reading and exploring its benefits, types, and more.

As the name signifies, a permanent life insurance policy provides permanent coverage for your life even after your death, given that you pay the premium accordingly. It ensures timely death benefits after the policyholder’s demise, securing their family financially.

Also, when you get permanent life insurance, you can access a savings account to build "cash value." This grows over time and allows the policyholder to use it after retirement or to meet other financial goals within their lifetime. Thus, permanent life insurance combines savings components and death benefits at the same time, making it more profitable than other cheaper term insurances.

The working principle of a permanent life insurance policy is straightforward. Policyholders need to pay a fixed premium amount throughout the tenure. Timely premium payments keep the policy active for the policyholders’ entire life.

This premium amount accumulates as cash value and death benefit, and a part of the premium amount also contributes to the insurance cost. Moreover, policyholders can take out a loan from the cash value, but if it is not repaid on time, this can reduce the amount of the death cover.

1. Age and Health

2. Type of Policy & Its Features

3. Cash Value Growth

4. Coverage Amount

5. Lifestyle Choices

1. Whole Life Insurance

Whole life insurance offers fixed premiums: this implies that the amount you will pay throughout the entire life of the policy stays constant. The policy guarantees a death benefit for you.

Pros of Whole Life Insurance:

• Lifelong coverage
• Cash value
• Tax benefits

Cons of Whole Life Insurance:

• Higher cost
• Smaller death benefit
• Lack of investment control

2. Universal Life Insurance

In Universal life insurance, the premiums and death benefits can be changed. This adjustable approach is tailored to policyholders' changing times. Under a universal life insurance policy, cash value accrues at prevailing interest rates, depending on prevailing economic conditions.

Pros of Universal Life Insurance:

• Flexible premiums
• Potential cash value growth
• Flexible death benefit

Cons of Universal Life Insurance:

• Needs policy monitoring
• More prone to risk

3. Variable Life Insurance

Variable life insurance provides an opportunity to invest besides providing lifetime coverage. Cash value can be allocated into different sub-accounts, like stocks, bonds, or mutual funds, hence providing a possibility of great growth.

Pros of Variable Life Insurance:

• Offers cash value
• Tax benefits
• Flexible

Cons of Variable Life Insurance:

• Higher cost
• Increase in premium payments
• Restricted flexibility

4. Indexed Universal Life Insurance

Indexed universal life insurance is based on the policy's cash value and a stock index's performance. So, in good performance, this could accumulate significant cash value, but in weak periods, it protects the downside with a guaranteed minimum return.

Pros of Indexed Universal Life Insurance:

• Growth potential
• Flexible
• Tax benefits

Cons of Indexed Universal Life Insurance:

• No return guarantee
• Limited gains
• Taxable

Mentioned below are a few advantages of permanent life insurance:

• If the insured passes away while the policy is ongoing, then the death benefit is paid to the nominee.
• Most permanent life insurance policies have a fixed premium, which reduces the stress of fluctuations and keeping a check.
• Many permanent life insurance coverages give tax benefits, such as tax-free death benefits and tax deductions under the 80C section (maximum ₹1.5 lakh).
• One of the main advantages is that permanent life insurance provides lifelong coverage even when the person lives till 100.

Despite so many advantages, permanent life insurance policies do have some disadvantages as well. Here are some of them:

• In a permanent life insurance policy, the premium is much higher than that of a term insurance policy.
• A permanent life insurance policy offers additional savings, but understanding its components can be complex. This may lead to mismanagement and unexpected costs.
• The cash value amount in a variable insurance policy may vary depending on the market conditions. Thus, market risk is involved.
• If you want to cancel the policy, you must pay a high surrender charge and administrative fees.