Permanent Life Insurance: Definition, Pros and Cons

by David Lewis

If you put a gun to my head and asked me whether or not it made sense to buy permanent life insurance, I'd probly say "yes".

That's the short answer.

The slightly longer answer is "Probably yes for most people, but it really depends." There will always be outliers where it doesn't make sense for one reason or another.

But if you're looking at normative cases, there's a ton of value in permanent life insurance, but only when you understand how it works, why it works the way it does, its strengths and its weaknesses and shortcomings.

If we're talking about a healthy, 35 year old with a great diet, who exercises 5+ days a week in some capacity, gets regular checkups, has no health problems, who has a relatively clean driving record and no overtly risky hobbies, has a family and makes a decent income, and has a need/want for conservative (AKA "safe money") savings, then I would say "yes, absolutely". If we're talking about a broke-and-single 70 year-old overweight couch potato smoker with a family history of heart disease, and no aspirations to leave any money to charity, then the answer is a solid "no."

I realize there's a wide gulf between the above two personas, so allow me to elaborate on what, exactly, permanent life insurance is and the pros and cons of buying it so you can decide for yourself where you fit on the continuum.

What is permanent life insurance?

Permanent life insurance is a type of life insurance policy that's designed to be held—wait for it—permanently. As in, for your entire life. The most basic permanent life insurance policy is called "whole life insurance". A more complex variation of permanent life insurance is "universal life insurance".

Both types of permanent life insurance can build cash value, which represents the current value of the policy's death benefit, though not all universal life policies build cash value (confusing, I know).

How does permanent life insurance work?

It's very simple:

  1. Premiums are paid to the life insurance company.
  2. Expenses are deducted from the current premium + any existing cash value to support the death benefit and operations of the company.
  3. The remainder is credited with interest.

Aaaaaaaaaand, that's it.

As long as the policy has cash value, the policy stays in force. If the cash value ever drops to $0, the policy lapses (terminates).

Everything else is (kinda-sorta) a dog and pony show.

Now, there are some quirks and nuances built into some life insurance policies. For example, Guaranteed Universal Life (GUL) is a type of universal life insurance that doesn't build cash value. Instead, the insurance company keeps whatever cash value the policy would have generated, builds a capital reserve for the policy, and guarantees the death benefit regardless of what happens to the implied cash value. Even if the cash value would have gone to $0, the insurance company keeps the policy in force for you as long as all required premiums are paid on time.

Whole life insurance and most forms of universal life insurance build cash value you can either withdraw or borrow against (sort of like a home equity line of credit). The borrowing function of permanent life insurance adds some amount complexity to the policy, but not much.

The loan works like a standard line of credit (LOC), except that interest accrues daily on the outstanding principal amount and payments made on policy loans throughout the year go to reduce the principal of the loan first before interest is paid.

In some cases, the interest credits for the policy are matched to the interest on loans, effectively canceling each other out. In other cases, there's a small spread in either direction, resulting in a net low-cost loan or loan arbitrage.

Permanent life insurance vs. term life insurance

The major difference between permanent life insurance and term life insurance is the cash value and premiums used to support the policy in a permanent policy. Since term life insurance has no cash value, and is designed to be in force for a much shorter period of time, it has much lower premium payments. The premiums are used to support the policy in a more direct way. Missed premiums on term insurance will cause the policy to lapse. Missed payments on permanent life insurance won't necessarily cause the policy to lapse because most policies include either an automatic premium loan option (APL), which will use the existing cash value to make the premium payment (whole life), or the policy automatically has expenses deducted from the cash value (UL). Permanent life insurance policies also have other important and substantial long-term benefits that term policies don't.

Kinda makes sense if you think about it. You get less from term insurance, so you pay less. Whole life insurance has higher premiums, but you get a lot more value from the policy.

Cost of permanent life insurance vs term life insurance

What policyholders tend to like about term life insurance is the fact that you can temporarily buy lots of death benefit from the insurance company for a very low premium. A $1 million 30-year term life policy on a 45 year old male, non-smoker, with a standard risk rating might have a premium of $3,308.69/yr (Source: Banner Life Insurance Company, valid as of April 2024).

The same $1 million of whole life insurance might have a premium of $23,430/yr (Guardian Life Insurance Company of America, whole life 121, valid as of April 2024) or $18,550 (Penn Mutual Life Insurance Company, valid April 2024).

Even on the lower end of things, the whole life premium is 5.6 times higher than the term premium. Easy to see why a lot of people choose term insurance.

However, to get at the true cost of the whole life insurance, you need to strip out the cash value from the policy, and see what portion of the premium is going to support the cost of the death benefit. With term insurance, this is theoretically simple to understand. A lot of the premium (if not all) should be going to support the death benefit. It doesn't work exactly this way in practice, but it's close enough.

With whole life insurance, you have to employ a little bit of algebra to get at the answer, but it can be done. I go into more detail about the cost of whole life and term insurance, and how to calculate the true costs of both, in my other post titled, The Cost Of Whole Life Insurance Vs. Buy Term And Invest The Difference.

Types of permanent life insurance policies

There are essentially 5 different types of permanent life insurance being sold in the U.S. today:

  1. Whole life insurance
  2. Current assumption universal life insurance
  3. Guaranteed universal life insurance
  4. Variable universal life insurance
  5. Indexed universal life insurance

Whole life insurance

Whole life has 3 things that other permanent policies don't have:

  1. Guaranteed level premiums
  2. Guaranteed cash values
  3. Guaranteed death benefit

These guarantees create a very stable life insurance structure, and in fact gives whole life a structural advantage over other forms of permanent life insurance. There are no assumptions about what the policy will do.

Participating policies (dividend-paying) also include the option for higher cash values and death benefits from non-guaranteed dividend payments. Each year, the insurance company will determine how much it can afford to pay policyholders back as a dividend. The amount can (and does) change each year, and depends entirely on the company's annual performance. Once the dividend is paid, the policyholder can choose to receive the amount in cash, keep it on account with the insurance company, use it to reduce the premium payment, or use it to buy additional paid-up life insurance. If the dividend is used to buy paid-up life insurance, it becomes part of the guaranteed cash value and can't be lost.

Whole life is a staple product that has traditionally performed well over long periods of time. It's also a perennial bestseller for the large old mutual life insurers.

Current assumption universal life insurance

Current assumption ULs (CAUL) were very popular during the 1980s. Agents took advantage of the low rates of the 1970s by replacing underperforming whole life policies (mostly non-participating) with universal life policies paying double-digit crediting rates.

When I first started in the life insurance biz back in 2004, I serviced a lot of these older UL policies and saw many of the assumptions made when the policy was sold. Back then, there was an old saying, "Pay three and you're free" or "Pay for, and no more". Meaning, the interest credits of the UL policy were supposed to be so high, you could make 3 or 4 annual premiums and then quit forever.

It didn't work.

Reason being, universal life is entirely driven by assumptions, with what I'd call "technical guarantees" backing up the policy. ULs do have a minimum guaranteed crediting rate, and maximum guaranteed policy charges, but there's no guaranteed net cash value or death benefit. And, when you throttle the policy to hit the minimum crediting rate and maximum charges, it nearly always causes the policy to crash and burn.

Guaranteed universal life insurance (GUL)

GUL was created in response to the failure of CAUL to deliver on its initial soft promise of a higher performing permanent life insurance policy. A lot of the older current assumption ULs lapsed due to interest rates (and thus policy crediting rates) falling in the 1990s and early 2000s. Lots of policyholders got that infamous letter in the mail telling them they'd need to either lower the death benefit of their policy or... dramatically increase their premium payments. In some cases, they were told they had to do both or the policy would lapse.

Naturally, policyholders were a teeny tiny bit upset about that.

And so... life insurers came up with the brilliant idea of a guaranteed death benefit UL policy.

The catch?

There's no cash value component (or if there are cash values, they're minimal).

GULs have a level guaranteed death benefit and guaranteed level premiums. As long as the premiums are paid on time, the policy stays in force and is guaranteed to never lapse. If premiums are paid too early or too late, it can negatively affect the no-lapse guarantee provision. Sometimes, it destroys the guarantee.

On paper, GUL solved the problem of losing a death benefit due to lapse. All the sudden, interest rates and cash values didn't matter.

Variable universal life insurance

Variable universal life (VUL) was created on the back of current assumption UL, and was geared towards policyholders who still wanted an accumulation-driven life insurance policy, but without being tied to falling interest rates. The idea being, if policyholders couldn't get policy performance from high yielding bonds, they could get it from the stock market instead.

VUL allows policyholders to allocate their cash value to "subaccounts", which look, feel, and act just like standard equity mutual funds, except they exist only inside a life insurance policy. Owning mutual funds inside an insurance wrapper allows policyholders to tie the performance of their policy to the stock market, which works well when the stock market is doing well and not so well when the stock market crashes.

VUL worked well in the 1990s when the market was on a seemingly never-ending bull run. Then, it kinda fell out of favor in the late '90s and early 2000s. It saw a mild resurgence after 2008, and seems to be seeing somewhat of a revival today.

Indexed universal life insurance

Indexed universal life was created on the back of the variable ULs of the 90s.

This type of UL promises "upside potential without downside risk"—a perfect antidote for the late 90s and early 2000s (and especially 2008). Policyholders receive interest credits based on the upward movement of a stock market index, without having to invest directly in the index.


Not really. Insurers take the premiums and invest them in high quality bonds. Then, siphon some of the interest off the bonds to buy index call options on the S&P 500 or some other popular equity index. The insurer uses call spreads—buying an "at the money" (ATM) call option and simultaneously selling a slightly "out of the money" (OTM) call option—to support a cap rate (or participation rate) for the policy. In some cases, there's no cap. Instead, the insurer uses a spread (fee) to support "uncapped" index growth.

Whatever the case, the cap/par rate is the maximum amount of money the insurer can credit to the policyholder's cash value account. For uncapped indexing, the insurer subtracts the fee before crediting the remainder to the policyholder's cash value.

If the strategy flops, then the policyholder gets a big fat goose egg, but doesn't lose money (not from the index, anyway). This is the "downside protection" of the policy. Cost of insurance (COI) and other policy charges are still deducted, though. So, it's possible to have a zero credit year and still lose money due to charges coming out. In fact, this situation is almost inevitable at some point.

Understanding the cash value of permanent life insurance

Thanks to financial gurus spreading their confusions via social media, there's a huge misunderstanding about what the cash value of a permanent life insurance policy is.

Cash value is the net present value of the future death benefit. In other words, it's what the death benefit is worth, right now. And, in the future, that cash value will equal the death benefit, which is called "endowment".

Imagine buying some item at a discount, and in the future it will be worth more. This is what the cash value is relative to the death benefit.

That's all it is.

Over the years, there's been lots of confusion about whether the insurance company steals your cash value when you die. This is nonsensical gibberish. The cash value is money set aside to pay for the future death benefit. The death benefit itself is really a combination of current cash value and pure insurance (the difference between the cash value and death benefit is called "net amount at risk").

There's nothing for the insurance company to "steal". You get exactly what the insurance company promises in the contract.

Advantages and disadvantages of permanent life insurance


  • Guaranteed level premiums (whole life insurance and guaranteed universal life insurance)
  • Guaranteed lifetime death benefit (whole life insurance and guaranteed universal life insurance)
  • Guaranteed cash value growth (whole life insurance)
  • Return on cash value similar to high-quality bond fund
  • Whole life dividends can significantly add to the guaranteed rate; universal life crediting rates, caps, and participation rates might increase substantially—you might earn significantly more than originally illustrated
  • Liquidity similar to money market fund
  • Option to invest in equities (variable life insurance)
  • Upside potential with downside risk protection (indexed universal life)
  • Tax-free buildup inside the policy
  • Tax-deferred or tax-free access to cash values via partial surrenders and policy loans—Borrow against the cash value of the policy for major expenses
  • Policy loans are tax-free, generally low-cost, and offset by interest credits from the issuing insurance company
  • Option for accelerated death benefits riders
  • Premiums waived when disabled (with disability waiver of premium rider)
  • Option to buy additional paid-up life insurance without underwriting (whole life insurance)
  • Option to transfer who is insured under the policy (certain whole life and universal life policies)
  • Optional guaranteed purchase option allows future insurance purchases without evidence of insurability
  • Ability to protect pension payments for spouse ("pension max")
  • Cash values can be used to supplement retirement income ("LIRP")
  • Cost of whole life insurance is lower than term insurance if held to maturity/endowment—20 and 30-year cost might be lower than term insurance if the policy is a high cash value policy
  • No volatility in cash values allows policyholders to take more risk in investments, can offset investment losses and be used to buffer volatility in investments
  • Whole life insurance is a simple and straightforward product design, structurally stable
  • Major mutual carriers that issue whole life insurance have a 100+ year history of paying dividends, and all of them have excellent financial ratings
  • Provides liquidity at death—the death benefit is immediately transferred to heirs, bypassing probate
  • Provides asset protection in some states—certain state laws prohibit creditors from taking the cash value and death benefit to satisfy a debt
  • Can avoid estate taxes if placed in an irrevocable life insurance trust (ILIT)
  • Can provide financial security for a disabled dependent if you yourself will never be financially independent
  • Can be used to fund "key man" insurance plans, executive bonus plans, and buy-sell agreements


  • More complex than term life insurance
  • Higher premiums than term insurance
  • High fixed expenses in the early years of the policy (retail whole life and universal life)
  • Can be more expensive than term if the policy lapses in the early years
  • Limited liquidity in the first 3-7 years of most policies—you might not "break even" until years 7-15
  • No "wiggle room" in premium payments
  • Expected returns are lower than equities
  • Policy loan interest compounds annually if not paid, and can eventually cause the policy to lapse
  • Policy loans and withdrawals might negatively affect the policy's death benefits—unpaid policy loans reduce the net death benefit paid to beneficiaries at death
  • Some supplemental term riders added to whole life and universal life policies can potentially become prohibitively expensive to the point of causing negative returns on cash value over the long-term
  • Policies can potentially become a modified endowment contract (MEC) if too much premium is paid in any given year or significant material changes are made to the policy via changes to the death benefit, partial surrenders, or policy loans
  • Mutual insurance companies can demutualize and nuke the dividend; stock companies can sell off unprofitable lines of business to another company that will lower crediting rates and raise policy expenses
  • Universal life insurance has built-in "levers" allowing the insurance company to increase expenses and decrease crediting rates
  • Mutual insurers can lower dividends based on negative company performance—you might get far less than what was originally illustrated

When should you buy permanent life insurance?

Until or unless medical science gives you complete control over biological aging, assume you're going to die at some point. That being the case, life insurance can be appropriate for anyone at any age. But, not everyone values the coverage, and that's what it really boils down to. If you have lots of assets, and you want to protect and transfer those assets in a simple and tax-advantaged way, permanent life insurance is the simplest way to do it.

Some will argue the step-up in basis at death makes permanent life insurance policies unnecessary but, as with any tax favors, the IRS can and does change the rules. Rev. Rul. 2023-2 now disallows the step-up in basis at death when assets are placed into an irrevocable trust. To get the step-up basis, assets must be in a person's taxable estate.

Of course, this opens them up to estate (and other) taxes. Of course, if a person's estate is small, it might not be a big deal. But this also assumes you won't be liquidating those assets before death and that your heirs won't want to liquidate them either.

Plenty of times when a parent has left a house to their kids, for example, and they want nothing to do with it—they just want to sell it. They'll pay a bunch of taxes on it. If you care enough to leave them something, the life insurance can either pay the taxes for them or eliminate the burden of taxes altogether for liquid assets if using an irrevocable life insurance trust.

Either way, permanent life insurance is a simple way to pass wealth onto the next generation, while still benefiting from it (in the form of cash value) while you're still alive.

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About David

David Lewis is a licensed life insurance agent, and has worked in the life insurance industry since 2004. During that time, he has worked with some of the oldest and most respected mutual life insurance companies in the U.S. To learn more about him and his business, go here.