Life Insurance

A death benefit is the amount of money a policy pays beneficiaries upon the death of the insured. Death benefits for term policies are a fixed amount stated in the insurance contract. For permanent insurance the death benefit includes the value of any cash value built up within the policy. Any value of unpaid loans taken against the cash value account within the policy would be deducted from the death benefit, however.

Term life insurance provides coverage over a specific period of time, such as 10 or 20 years, and only provides a death benefit during the policy period rather than over the lifetime of the insured. Term life insurance, while less expensive, does not provide the ability to build cash value like permanent life policies.

Whole life insurance is the traditional type of permanent life insurance with a savings component that accrues with a fixed rate of return on a tax-deferred basis. Whole life insurance lasts the life of the insured as long as premiums payments are maintained. Any outstanding loan amounts made against the cash value of the policy decrease the death benefit paid upon death of the insured. Otherwise, any cash value that has accumulated over the course of the policy is added to the death benefit that is payable to the insured person’s beneficiaries.

Universal life insurance is permanent life insurance with a cash value that earns interest, as with whole life insurance.  What makes universal life insurance different is that it features flexible premiums that can be adjusted over time. Universal life insurance can also offer either a fixed death benefit or one that increases over the course of the insured’s lifetime.

Variable life insurance is a type of permanent life insurance that builds cash value. The main feature of variable life is that it involves separate accounts that invest in various securities instruments like stocks, bonds, and annuities. Variable life insurance is considered securities contract as it involves investment risk.

Cash value is the savings component of permanent life insurance policies (whole life, universal life, and variable universal life). When you pay your premium, part of it goes to the cost of insurance and part goes to the cash value account, where it is invested and earns interest. After your cash value has reached a certain level, you can begin to access it during your lifetime for loans or withdrawals. Usually, your beneficiaries don't receive any cash value after you die.