What You Need to Know About Permanent Cash Value Life Insurance

Cash-value life policies have premiums that are higher at the beginning than they would be for the same amount of term insurance. In later years the premiums may actually be much less than term insurance because you build "equity" in the policy similar to the way you build equity in a home you buy vs. a home you rent.

The part of the premium not used to cover the yearly cost for mortality and other expenses is invested by the company and builds up a cash value that you may use in a variety of ways. Here are some specific examples of cash-value life insurance:

Whole (or Ordinary) Life

Like other cash-value policies, this is permanent coverage, where the cost is literally stretched out over your entire life, or what the insurance company expects your entire life period to be. Life insurers have tables that tell them how long, on average, someone of your age and physical health will live and they price their policies accordingly.

Say you want $500,000 in coverage. The insurance company's rates are based on how much it needs to charge you in order to allow the company to recoup the eventual death benefit while you are alive. The premium and the death benefit don't change much in whole life policies. You pay so much a month for a given death benefit. However, dividends to policyholders can increase the coverage or decrease the premium if you select a policy with dividends.

Universal Life

This is the flexible life insurance. You can change your premium and your death benefit at any time, although a substantial increase in the coverage usually requires you to prove you are still in good health. Some people refer to this as term insurance and invest the difference all in one policy.

Variable Universal Life

This is a hybrid universal life policy in which the cash value is dependent on the investment performance of separate accounts that you select. These separate accounts usually consist of a combination of money market funds, bond funds or stock funds. This is another so-called term insurance and invests the difference product with greater risk but potentially greater rewards than a universal life policy.

So which type of policy is best for you? In general, if you have significant assets, it's better (and less risky) to have some sort of cash-value policy. But which one? Actually, it's more important to buy the coverage from an insurer that has the best chance of performing well in the future.

An insurer that has low actual expenses and mortality costs. Such an insurer will be able to offer better terms, including higher death benefits, higher cash value and lower premiums.

Consumer TIP: But, again, there are more than 2,000 companies selling life insurance in the United States. As a result, you have thousands and thousands of options. This makes it even more imperative that you have a trained insurance professional analyze your financial situation and determine what kind of policy from which insurer is best for you.

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