Permanent insurance

Permanent insurance, sometimes called cash value insurance, is designed for lifetime protection.

• The death benefit is fixed
• The premiums for coverage remain the same year after year
• The policy remains in force as long as you continue to pay the premiums

Equally important, this type of insurance offers the opportunity for tax-deferred savings. Part of your premium pays for the insurance coverage and the issuing company's expenses in administering the policy. The rest goes into your tax-deferred cash value account. If you surrender, or give up your policy, you're eligible to get some of that accumulated value back. This cash surrender value, as it's known, is a tax-free return of your premiums unless the amount you get back is more than you've paid in over the years. Then income taxes are due on your gain, or the difference.

You can borrow a portion of the money from your cash value account more easily than you might be able to arrange a personal loan from a commercial lender. You're not required to demonstrate financial hardship, as you must before borrowing from your 401(k) or similar plan. There are also no restrictions on how you spend the loan or how fast you pay it back. The risk is that any amount you borrow reduces the death benefit that will be paid to your beneficiaries until that amount has been repaid.

Types of permanent insurance

Just as there are varieties of term insurance, there are varieties of permanent insurance.

Whole life is traditional permanent insurance. Sometimes also called straight life, this type of insurance has a guaranteed death benefit. The total cost of the coverage is guaranteed, but the premiums may be fixed, increasing or decreasing. Increasing premiums are adjusted upward as you grow older and are presumably making more money. Decreasing premiums drop off as you grow older because you've already paid most of the amount that you owe.

Universal life offers more flexibility than whole life, but at a greater cost. You can vary your premiums, even skipping some payments if there is enough money in your cash value account to cover what's due. You can also increase or decrease the death benefit if you wish while the policy is in force. Typically the rate at which you earn interest on your cash value account is higher in the first year than it would be on a straight life policy, but that rate can drop as low as the guaranteed floor, or lowest level, in later years.

Variable life policies allow you to allocate your cash value account among various investment options that the issuing company offers. The investment return on these choices, which resemble mutual funds or annuity subaccounts in structure, can impact the balance of your cash value account — pushing it higher when returns are good and lower when they are disappointing. In some policies, the death benefit is also affected by investment performance. The fees tend to be higher than on the plans without investment choice.

Variable universal life, as its name suggests, combines the flexible premiums and death benefit of universal policies with the opportunity variable life provides for investment gains or losses. It is often the most expensive alternative and may not be as widely available as the other types of insurance.

Survivorship life, sometimes called a second-to-die policy, insures the lives of two people and pays the death benefit only after the death of the second. It's available in many of the varieties of permanent insurance, and has typically been used by wealthy couples seeking to replace assets that their estate might have been forced to pay for estate taxes. It tends to be expensive compared with other types of insurance.

Finding a rider

Sometimes you can customize an insurance policy to cover particular needs by adding what's known as a rider. One example, a waiver of premium rider, allows you to suspend premium payments but keep your policy in force if you have a qualifying disability. Remember, though, that as useful as they may be, riders usually increase the cost of the insurance.