There are numerous types of permanent life insurance, but the most common are: whole life, universal life and variable life. Permanent life insurance provides lifelong protection. As long as you pay the premiums, the death benefit will always be there. Furthermore, you never have to medically re-qualify for permanent insurance like you do when you renew term insurance.
Most permanent policies have a feature known as "cash value" or "cash surrender value."
There are a number of advantages to having this cash value build up. For example:
- The cash value can be taken out either by withdrawing or borrowing. You may borrow from the insurance company, using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan is not dependent on credit checks or other restrictions. You ultimately must repay any loan with interest or the borrowed amount will be deducted from the death benefit, which goes to your beneficiaries. Because this method of withdrawal is considered a loan, it is an income tax-free transaction.
- The cash value accumulates on a tax-free basis provided the contract remains in-force and premiums do not exceed the MEC cooridor.
- The cash value is a personal asset and is reflected on your balance sheet.
- You may cancel or "surrender" the policy -- in total or in part -- and receive the cash value as a lump sum of money. Caution: If you surrender your policy in the early years, there may be little or no cash value.
- If you need to stop paying premiums, you can use the cash value to continue your current insurance protection for a specified period of time or to provide a lesser amount of protection to cover you for as long as you live.