Permanent (cash value) Insurance
It provides life-long protection as long as you continue to pay premiums. The premiums are based on your age at the time of purchase, and generally remain level. They do not increase as you age. Therefore, the younger you are when you buy the policy, the lower the premium you will pay for the life of the policy.
Because premiums remain level, permanent insurance is more expensive than term insurance. But permanent insurance accumulates cash value, which may be refundable upon surrender of the policy. While the policy is in force, cash values can be borrowed against or used to pay premiums.
The proceeds of many permanent life insurance policies can be used to ease the financial burden of catastrophic illness, terminal illness or long-term care. These accelerated benefits may be offered as part of the basic policy or as a rider to an existing policy.
With a permanent life insurance policy, you may borrow up to the cash value at an interest rate (fixed or adjustable) stated in the policy. Any unpaid interest is added to the loan. Any unpaid loan, including interest, will be deducted from the death benefit. The cash value can be used to pay premiums for a period of time, keeping the stated death benefit, or it can be used to purchase paid-up insurance in a lesser amount with no further premiums due.
There are four basic types of permanent insurance:
- Whole Life.
Sometimes also called life or ordinary life, this policy has a fixed guaranteed rate and develops guaranteed cash values. There are two variations on traditional whole life:
- Joint Whole Life: The policy insures two lives instead of one. Also called first-to-die coverage, the policy pays the death benefit to the surviving insured person when the first one dies. This is often purchased by a husband and wife.
- Survivorship Life: The policy insures two people and pays a death benefit only when the second person has died. It is designed for married couples who want to provide funds to pay estate taxes that may be due after their deaths. Also called second-to-die coverage.
- Universal Life.
This policy has more flexibility. Within certain limits, you can change the death benefit, the amount of premium and payment frequency. Unlike whole life, this is an "interest driven" policy, which normally pays a minimum guaranteed interest of 4% to 4.5%. If the interest rates are continuously low, additional premiums may have to be paid to avoid a lapse of coverage.
- Variable Life.
This policy has death benefits and cash values that vary with the performance of an underlying portfolio of investments that you select. The death benefit and cash value are not guaranteed. They can go down as well as up, although there may be a guaranteed minimum death benefit.
- Variable Universal.
This policy combines the premium and death benefit flexibility of universal life with the investment flexibility and risk of variable life.
On all of the above policies, riders are available at an additional cost for the following coverages:
Disability waiver of premium.
A feature added to some life insurance policies providing for the waiver of premium, and sometimes payment of monthly income if the policyholder becomes totally and permanently disabled.
A provision in a life insurance policy for payment of an additional benefit if death is caused by an accident. This is sometimes called double indemnity.
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