Permanent life insurance 101

Permanent life insurance policies offer a death benefit and potential for cash value. The death benefit is money that's paid to your beneficiaries when you pass away. Cash value is a part of the death benefit, and some policies provide a saving component you may be able to access while you’re still alive.¹ Permanent life insurance lasts from the time you buy a policy to the time you pass away, as long as you pay the required premiums.

Term life and permanent life are the two main types of life insurance policies. While permanent insurance lasts your entire life, term insurance lasts for a set time period that you choose when you buy a policy — say 10, 20 or 30 years.

An essential feature of most permanent life policies is a savings portion known as cash value. Cash value accumulates over time as you make regular payments toward your policy (these payments are known as premiums). You can typically borrow against your policy's cash value, which accumulates on a tax-deferred basis.¹ The cash value is different from the policy's death benefit. While the cash value is a savings that accumulates over time, the death benefit is the amount of money that your designated beneficiary will receive upon your death. If you cancel your life insurance policy, you will get the accrued cash value. However, you could be assessed a surrender charge for cancellation early in your policy, so be sure to check with your insurance provider first.

Though all forms of permanent life insurance are designed to be kept for the remainder of your life, there are several differences among the types of policies. Consider these common forms of permanent life insurance and their unique features:

• Whole life insurance is the most common type of permanent life insurance, according to the Insurance Information Institute (III). Typically, a whole life policy's premiums and death benefit stay fixed for the duration of the policy. Whole life policies have a guaranteed rate of return, according to Life Happens. That means the cash value of a whole life policy is guaranteed to earn a minimum amount of interest. Some whole life policies also pay out dividends. You may use dividends to reduce premiums, receive them as cash, purchase more death benefit or leave them to accumulate interest.
• Universal life insurance offers greater flexibility than whole life policies, says the III. For instance, universal policies may allow you to increase your death benefit² or reduce your monthly premiums once you accumulate sufficient cash value in your policy. Understand that some universal life policies may lapse, especially if you use up your cash value by applying it to premium payments. To prevent this, some universal life policies provide secondary guarantees that ensure the policy stays in force if enough premium is paid, regardless of the policy value.
• Variable universal life insurance³ policies typically include a variety of investment options that may help increase the cash value of your policy. The III advises, however, that investment losses can also reduce the policy's cash value and, subsequently, its death benefit. Variable universal life policies also offer adjustable death benefit and premiums.
• Indexed universal life insurance offers policyholders the option to track an index or indices and provide upside potential due to changes in an index over time (one year, for example). Many offer the option to participate in one or more indices, while providing downside protection when an index is down. Several also include a fixed rate if the customer chooses to participate.

Permanent life insurance can be an important tool to help secure your family's financial future. Have questions about the different types of policies? Get in touch with your local insurance agent, who can help you assess the options and choose a policy that's right for you.