Permanent life insurance covers you for the rest of your life — that’s what makes it different from term life, which only covers you for a limited time. You might also hear it referred to as “cash value” life insurance.
How Permanent Life Insurance Works
In the early years of your policy, your monthly payments include a portion intended to offset the higher cost of insuring you in later years. In the meantime, the insurance company invests that portion in an account called your "cash value" account.
Every time you make a payment, a portion goes into your cash value account. During the early years of your policy, the cash value contribution is a large portion of each payment. As you get older, the portion of your payment devoted to the cash value decreases. As long as you keep your policy, that cash value continues to grow tax-deferred.
Increasing the Cash Value of Your Policy
The cash value of a policy grows as you continue to make payments. It can also grow because of earnings. One type of permanent life insurance, whole life insurance, offers a guaranteed cash value account that increases based on a formula set by the insurance company.
Another type, universal life, offers a cash value account that reflects current interest rates. Variable life policies allow you to invest in accounts that operate like mutual funds. This means your cash value accounts can be invested in bonds, stocks, and other funds, known as subaccounts. The cash value will grow or decline based on the performance of your subaccounts.
Using Cash Value
You can use the cash value your account builds during your lifetime. You can borrow against it to pay for expenses, remodel a house, start a business, or put a child through college (to name just a few examples). If, when you pass away, you still have unpaid policy loans, the insurer will subtract what you owe from the amount your beneficiary receives.
If you surrender the policy before you die (i.e., cancel your coverage), you'll be entitled to receive the cash value, minus any loans and surrender charges. Many different types of permanent life insurance are available, including whole life, variable life, universal life, and variable universal life.
Want to learn more? I can tell you how these policy types are different and help you decide which is right for you.