Not Your Grandfather’s Life Insurance Policy

Traditional permanent life insurance policies provide death benefits and a savings feature. Other types of life insurance also do that, and more.

When you buy permanent life, you are buying two types of financial protection. The first, life insurance coverage, will pay a death benefit to your beneficiary if you die within the policy period. It works exactly like the coverage under a term life insurance policy.

Unlike term policies, permanent life policies also have a savings feature. You’ll pay more than you would for term coverage, but the excess premiums will create a reserve, which grows with time. All types of permanent life insurance use the same “two buckets” approach. The life insurance portion works the same in all of them—you select the death benefit you want, and the insurer will price the coverage based on the risk you pose. Younger, healthier people have a lower risk of dying, so their coverage will cost less.

How your policy’s reserve, or cash value, grows—and what you can do with it—will vary depending on the type of permanent life coverage you buy. Generally, you will not pay taxes on any investment gains while your policy is in force, and your beneficiary will receive death benefits free of income taxes.

With traditional permanent life insurance, also called “whole life” insurance, the insurer invests your premiums in excess of the cost of your death benefits. When you buy coverage, your insurer will typically give you an illustration of how the cash value could grow, given certain assumptions.


  • You get permanent life insurance protection.
  • Your premiums stay the same throughout your life, no matter your age or health status.
  • Your cash value grows tax-free.
  • Your cash value will never be lower than the guaranteed minimum, and may be more, depending on how the insurer’s investments perform. This makes permanent life a very safe investment.
  • When the cash value reaches a certain minimum amount, you can borrow it or make withdrawals, without tax penalties.
  • You do not have to include money from a permanent life policy on the FAFSA financial aid form. Money withdrawn from a 529 college savings plan or savings account must be included, which can affect the amount of grants, scholarships and aid a student qualifies for.


As with most low-risk investments, a traditional life insurance policy has fairly low yields. The funds that go into your policy’s cash value might grow faster invested in another manner.

With universal life coverage, you also get permanent life insurance. The investment component of your policy differs, though. Typically, your cash value account will be tied to selected mutual funds or an index, such as the S&P 500. With an index policy, your cash value bucket has minimal risk, because the insurer buys options on the performance of the index (for literally pennies on the dollar) to make the earnings grow inside the policy.


  • Your cash value can grow along with the selected fund or index.
  • It offers the same tax benefits and college financial aid benefits as a permanent life policy.
  • Y You can use accumulated cash value to pay your premiums.
  • You can adjust your premiums and the policy’s death benefit during the policy term.
  • You can withdraw cash value to reduce death benefits payable to your beneficiary. Withdrawals that exceed the amount you have paid in premiums could have tax consequences.


  • Insurers typically cap the rate of return on your cash value’s growth, so your earnings could be limited even if the insurer’s investments are skyrocketing.
  • Your life insurance protection will likely be annual renewable term (ART) coverage. This differs from whole life insurance, with guaranteed coverage and level premiums throughout your life. With ART, the insurer guarantees to insure you for a designated period, usually 10 to 30 years. It does not guarantee that your premiums will remain level. If your premiums don’t cover the cost of your death benefits—particularly as you age—the insurer could reduce your cash value to cover the difference. To prevent unpleasant surprises, request a policy illustration from your insurer every year.
  • An insurer may charge account maintenance fees for the investment portion of your policy. These will affect policy returns.


With variable life insurance, the cash value portion of your policy is invested directly in securities in the insurer’s portfolio.


  • You can apply any interest earned toward your policy premiums, which can lower your premiums.
  • You can invest your policy’s cash value according to your appetite for risk, and move investments during the policy term.
  • You can benefit from long-term growth in the stock and bond markets.


  • Your cash value could decrease, depending on the performance of the underlying funds. Your death benefit may also decline, although never below a specified amount.
  • This type of policy has the most investment risk.
  • Substantial taxes and insurance company surrender fees may apply if you withdraw your money early.
  • Fees will apply. Check to ensure that they are reasonable.


Variable universal life combines features of variable life and universal life policies. Because both variable and variable universal life policies involve investment risk, only agents with a securities license can sell them.

For more information on life insurance and its many uses, please contact us.