What Are The Disadvantages Of Permanent Life Insurance?

The two common types of life insurance are term life insurance and permanent life insurance. While the latter provides coverage for your entire life as well as a cash value component that can grow over time, it has some downsides that should be considered before making a decision.

Types of Permanent Life Insurance Policies

Type of PolicyDescription
Whole life insuranceOffers a death benefit as well as a savings component. Regular premiums are paid for a set death benefit amount, and the savings portion is contingent upon the dividends that a company pays.
Universal life insuranceHas more flexibility than whole life policies, with adjustable premiums that are typically lower than whole life insurance premiums.
Variable universal life insuranceHas a savings component that can be invested in stocks, bonds and money market funds. The value of this policy can grow quickly, but the risk of the stock market may affect the value as well. Some variable universal life policies have a guarantee that your death benefit will not fall below a minimum amount.
Indexed universal life insuranceAllows policyholders to allocate the cash value of the policy to a fixed account or an equity index account. You can grow your cash value tax-deferred for retirement while still growing your death benefit.
Guaranteed life insuranceHas a guaranteed death benefit provided that the policyholder pays the premiums to keep the policy active. It typically has lower premiums than whole life insurance, because it does not have a cash value accumulation.

Disadvantages of Permanent Life Insurance

The biggest drawback of permanent life insurance is that it is significantly more expensive than term life insurance. In addition:

  • If you miss a payment or cannot afford to make payments anymore, your policy could cancel.
  • The longevity of permanent life insurance policy is a disadvantage, because if you buy a policy and discover you no longer need coverage, you would have paid premiums up until this point and lose all the money you had already paid into the policy.
  • They cannot be converted into another type of policy.
  • The terms of permanent life insurance policies are more complex than those of term life alternatives and thus harder for customers to understand.
  • Because of the higher premiums, these policies may produce a mediocre return on the investment.

While there are advantages to purchasing this type of policy, there are also downsides. Therefore, before committing to buy a permanent life insurance policy, whether whole life or cash value, universal or variable, make sure you know what you’re getting – and not getting.

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