Permanent insurance: Whole, universal, variable

Term insurance is the most common life insurance policy, and it is one that doesn't help build savings. Think of it as renting a safety net. You pay a fixed premium toward a specific payoff over a specific period of time, perhaps one, five or 10 years. If you die during that period, the insurance company pays the promised amount to your beneficiaries. When the policy reaches its deadline, the coverage ends. If you outlive the coverage or if you cancel the policy, you don't get any money back. There is no savings element with term insurance, there's only a death benefit.

Permanent insurance
Insurance companies also offer permanent insurance, policies that cover you for life and provide a tax-deferred savings opportunity, provided you continue to pay the premiums. Three prominent variations of permanent insurance are whole life, universal life and variable life.

With permanent insurance there's an investment component to build cash value in addition to the death benefit. A policy's face amount is the money that will be paid at death or at policy maturity -- most permanent polices mature around age 100. Cash value is the amount available if you die or surrender a policy before its maturity, according to the Life and Health Insurance Foundation for Education, or LIFE.

Term vs. permanent insurance

Term insurance Permanent insurance • Coverage over set period • No savings benefits • Fixed premium over term • Outlive policy or policy cancellation • Results in no money back • Death benefit paid to beneficiaries • Coverage for life • Tax-deferred savings benefit if premiums are paid • 3 variations of permanent insurance: whole life, universal life and variable life include investment component

The cash value grows tax-deferred until you withdraw it. You can borrow against the cash value for any purpose, but you'll have to repay it or your beneficiaries will receive reduced benefits. But building cash value means higher premiums, so these polices are much more expensive than term insurance.

Whole life, according to LIFE, provides you with a guaranteed death benefit and a guaranteed rate of return on your cash values. You pay a set premium that is guaranteed to never increase.

With universal life, the insurer separates the death benefit from the investment portion of the premiums, putting your investment dollars into its choice of bonds, mortgages and money markets. Then your investment fund pays for the cost of the set death benefit. No matter how poorly your investments do, you are guaranteed a minimum death benefit. If the investments do well, your heirs receive more money.

The death benefit and the cash value in a variable policy vary with the performance of the underlying investments, says LIFE. With variable life you're shifting risk from the insurance company to yourself because you're trying to achieve greater returns.

Permanent life policies can be complex. Don't buy such a policy if you don't understand it. If the seller explains it to your satisfaction and it meets your needs, then by all means get permanent life insurance.

Many experts say that, generally, these policies should not be used as savings vehicles for a child's college education or for retirement. Better options would be a 529 plan, prepaid tuition plan, the federal Coverdell plan, a 401(k) or an IRA where you're not paying an insurance premium.

A permanent life insurance policy might be good if you have a disabled dependent who will need long-term care. In that case, you might want to insure yourself for your entire life, as opposed to a typical situation where parents stop insurance coverage when their children finish college.