Permanent Insurance: Whole, Universal and Variable

There are life insurance policies that benefit you in two ways: they pay in the event of death and they allow you to accrue tax-deferred savings. It can be a bonus if you are in need of insurance anyway, but you shouldn't buy an insurance policy as a way to save money. There are better, more economic ways to save.

The most common form of life insurance is term insurance. It doesn't build savings; instead, you are basically renting a policy. You pay a fixed premium for a preset amount of years, like five, 10 or 20 years. Your premium remains the same each year. If you die during the period, the insurance pays you the amount of life insurance that has been promised. Once the term is up, the coverage ends. All promises between you and the company are cancelled. If you outlive the coverage or if you cancel the policy, you will not receive any benefits. This is simply a death benefit, not any form of savings.

Permanent insurance policies cover you for life and offer a tax-deferred savings opportunity for as long as you pay the premiums. There are primarily three variations of permanent insurance: life, universal life and variable life.

Permanent life insurance provides you with an opportunity to build cash value in addition to the death benefit. The face value of the policy is the amount of money that is paid at death or policy maturity. Most permanent policies will mature when you reach 100 years of age. The cash value amount is available to you if you die or surrender a policy before its maturity.

The cash value of your policy will grow until tax-deferred until you withdraw it. You are able to borrow against the cash value of your policy, but if you don't repay it your beneficiaries will receive reduced benefits. In order to build cash value, you will have to pay higher premiums. These policies are much more expensive than term insurance.

According to the Life and Health Insurance Foundation for Education (LIFE), whole life policies provide you with a guaranteed death benefit, plus a guaranteed rate of return on your cash value. Your set premium is guaranteed to never increase.

With a universal life policy, your insurer separates your death benefit from the investment portion of your premium. The investment dollars are placed into bonds, mortgages and money market accounts. Your investment fund will pay for the cost of your set death benefit. Even if your investments do poorly, you will be guaranteed a minimum death benefit. If you do well, your beneficiaries receive more money.

A variable policy has death benefits and cash values that vary based on the performance of underlying investments. You assume a greater risk by trying to achieve greater returns.

There are instances where permanent life insurance is a better fit than term insurance for a family. If you have a disabled dependent that will need long-term care, a permanent life insurance policy might be your best choice. Most parents only insure themselves for as long as they have children and school and are working outside the home. In your situation, you may want to insure yourself for your entire life.

Permanent life policies can be hard to understand. Be sure that you understand all for the terms before you buy a policy. Most advisors say that you shouldn't use these policies for saving for retirement or a college education. There are better options through a 529 plan, prepaid tuition plan, Coverdell Plan, a 401(k) or an IRA. In these plans, you do not have to pay for an insurance premium to build your money.

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