What Is Lifetime Insurance and How Does It Work?

“Lifetime insurance” is a common term for permanent life insurance, a type of coverage designed to protect an individual for their entire life, rather than for a specific period. This policy provides a financial safety net for beneficiaries, ensuring funds are available upon the insured’s passing.

Defining Permanent Life Insurance

Permanent life insurance features two main components: a death benefit and a cash value component. The death benefit is the sum paid to the designated beneficiaries when the insured person dies. The cash value component acts as an internal savings or investment feature within the policy. This cash value grows over time on a tax-deferred basis, meaning taxes on the gains are typically not due until the funds are withdrawn.

Core Features of Permanent Life Insurance

Premiums for these policies are fixed and can be paid for the life of the policy or for a specified duration. A portion of each premium payment covers the cost of the death benefit, while another part contributes to the policy’s cash value.

The cash value grows over time. Policyholders can access the accumulated cash value through policy loans or withdrawals. While policy loans accrue interest, often ranging from 5% to 8%, withdrawals directly reduce the death benefit. Loans are tax-free, provided the policy does not lapse and the loan amount does not exceed the premiums paid.

The death benefit is paid income tax-free to beneficiaries as long as the policy remains in force. If the policy lapses or is surrendered, surrendering means canceling it to receive the cash surrender value, which is the cash value minus any surrender charges and outstanding loans. Surrender charges can apply and typically decrease over the policy’s early years. If the cash value withdrawn or received upon surrender exceeds the premiums paid, the excess amount may be subject to income tax.

Variations of Permanent Life Insurance

Several types of permanent life insurance policies exist, each with distinct characteristics regarding premium structure and cash value growth. Whole life insurance is the most traditional type, offering guaranteed level premiums, a guaranteed death benefit, and guaranteed cash value growth. The cash value in whole life policies grows at a steady, minimum guaranteed rate.

Universal life insurance (UL) provides more flexibility than whole life insurance regarding premium payments and death benefit amounts. Its cash value grows based on an interest rate declared by the insurer, which can fluctuate. Policyholders can adjust their premiums within certain limits, even skipping payments if sufficient cash value exists to cover costs.

Indexed Universal Life Insurance (IUL) links its cash value growth to the performance of a specific market index, such as the S&P 500. While IUL offers potential for higher returns, it includes “caps” that limit potential gains and “floors” that protect against market downturns, guaranteeing a minimum return of 0%. This limits downside risk while capping potential upside.

Variable Universal Life Insurance (VUL) allows the cash value to be invested in various sub-accounts, similar to mutual funds. This policy offers the potential for higher growth, but it also carries higher risk, as the cash value can fluctuate with market performance, potentially leading to losses. VUL policies also offer flexible premiums and death benefits, similar to universal life insurance.

Permanent Versus Term Life Insurance

Permanent and term life insurance differ in duration, cash value, and premium structures. Permanent life insurance provides coverage for the entire duration of the insured’s life, as long as premiums are maintained. Term life insurance offers coverage for a specific period, ranging from 10 to 30 years. If the insured outlives the specified term, coverage ceases unless renewed at a significantly higher premium.

Permanent life insurance policies build cash value over time, which can be accessed by the policyholder. Term life insurance policies do not accumulate cash value and are designed for temporary death benefit protection.

Permanent life insurance has level premiums that remain the same for the life of the policy. Term life insurance premiums are also level for the chosen term, but they can increase substantially if the policy is renewed. Permanent life insurance provides lifelong coverage and a savings component, while term life insurance covers temporary financial obligations, such as a mortgage or children’s education.