Life Insurance Advice for the Long Term

Policies referred to described as "permanent life insurance" are a different breed altogether. These policies, which are most commonly known as "whole life" and "universal life," also include a death benefit. They do, however, have a monetary value. With each premium payment, part goes toward paying for the pure death benefit. A portion of the money is spent on fees and overhead. Part of the money goes into the insured's investment account, which is referred to as the "cash value," "fund value," or "cash surrender value." Each year, the cash value component will earn a return — a rate of interest — which will be credited to the account.

A whole life insurance policy is simple to understand. The amount of the premium does not usually alter during the course of the policy's term. Premium payment durations are sometimes decreased to twenty years or even fewer, but the monthly premiums are substantially greater because they are compressed into a shorter period of time. A whole life policy's cash value can be used as collateral for a loan, and the insured can borrow against the cash value from the insurance company. Any money borrowed has to be repaid, plus interest. And the cash worth grows tax-free as interest accrues.

Universal life is similar but more flexible, in that the insured can shift money between the insurance and cash value components of the policy. With whole life, premium payments are constant, and the parts of each payment that goes toward cash value, insurance, fees, and overhead are not disclosed. With universal life, premium payments are broken down into transparent cash value and insurance components, and the insured can adjust the level of payment as long as there are sufficient funds to cover the insurance and overhead components. For instance, if the cash value is generating a certain level of interest every month, the insured may elect to use this income to pay the insurance component of each premium, thus reducing the number of external funds required to keep the policy active.

One other common variation of permanent life insurance is called "variable life." These policies are similar to whole life and universal life in that they have a cash value, but the cash value can be kept in a separate account, maintained by the insured, and invested in a range of products available through the insurance company's portfolio including stocks, bonds, mutual funds, money market funds, and other investment products. The insured assumes all investment risk, and if the cash value plummets because of bad market performance or unwise investment choices, the insured may need to make substantial payments to the insurer in order the keep the policy active.