Permanent Insurance
• This type of insurance combines death benefits with an accumulation feature.
• The buyer of a permanent policy pays more in the early years than for term
insurance, but the money not needed to pay for the cost of the death benefit
accumulates at interest.
• If the policy is surrendered before the insured dies, there may be a cash value
paid to the policy owner.
Important Point
As a general rule, it is not a good idea to buy permanent life insurance if policy
owner plans to surrender early.
• If all premiums are paid, permanent insurance usually lasts for the whole life of a
person, and pays death benefits to the beneficiaries named in the policy upon the
death of the insured.
• The cash value can be used as loan collateral for borrowing funds at the interest rate
specified in the policy. Any outstanding loans are deducted from policy proceeds at
death or surrender. Some of these products may enjoy tax advantages.
• A policy lapse or surrender may create a taxable event and may generate a Form
1099.
Some of the most popular types of cash value insurance are described below:
Whole Life Insurance
􀂃 Whole life policies are a type of permanent life insurance that offer protection
throughout a lifetime—that is for a person’s whole life. The individual pays the
same scheduled premium from the day he/she buys the policy.
􀂃 There is no need to renew whole life policies. As long as policy owner pays
the premium when due, the policy remains in force throughout the insured’s
life or until the policy owner cashes it in.
􀂃 The scheduled premium may be level or increase after a fixed time period,
but the premium will not change from the amount shown in the policy
schedule. It is important that the policy owner look at the policy schedule and
understand what his/her premium payments will be and that he/she can afford
them.
􀂃 An insurance company will base the premium on the insured’s age at the time
of purchase. Initially, the premium for a whole life policy will be higher than
that for a term policy. The policy owner likely will pay a lower premium when
the insured is older, if the policy owner keeps the policy for a long time. Part
of each premium payment goes to the cash value growth, part for the death
benefit, and part for expenses such as commissions and administrative costs.
􀂃 The applicant should be provided the company’s history of projected
dividends versus paid dividends.
There are two types of traditional whole life policies:
􀂃 Nonparticipating policies provide a schedule of guaranteed premiums
and death benefits and a table of guaranteed values, but they pay no
dividends.
􀂃 Participating policies guarantee premiums, death benefits, and cash
values, and may also pay policy dividends. Because of the dividend
feature, premiums tend to be higher. Policy owners have several options
for using policy dividends, including:
• Letting the dividends accumulate with interest
• Taking the dividends in cash
• Using the dividends to pay toward the premium, buying permanent
paid-up additions, or buying a combination of one-year term and
additional permanent paid-up additions.
􀂃 Some companies fail to pay dividends at the originally projected rate,
while others exceed their original projections. When making purchase
decisions, the prospect should remember that dividends are not
guaranteed and may differ from those shown in illustrations.
􀂃 Endowment Insurance is the third of the basic whole life insurance
policies. This policy specifies a time period and if the policyholder dies
within this specified time period, the policy proceeds are paid to the
beneficiary; if not, the proceeds are paid to the policyholder.