There are four major types of life insurance. Traditional whole life/permanent, universal life, variable universal life and term insurance. There are variations within each type. In the case of traditional whole life, both the death benefit amount chosen and the premium are designed to stay the same, remain level, throughout your lifetime. Unlike term that will expire, whole life provides a life time of protection.
The insurance company keeps the premium level by charging a bit more premium in the early years. This additional premium is invested by the carrier which returns income to supplement your level premium in the later years of your life. These investments help pay the premium cost of your life insurance policy as you age
By law, when this extra allocation of premium or “over payment,” reaches a certain amount level, a policy will have built up or accumulated what is known as “cash value.” The cash value is available to the policy owner if he or she decides not to continue with the original plan. The cash value is an alternative, not an additional, benefit under the policy. The cash value is taxed-deferred until you withdraw or borrow against the available value.
Insurance should not be your be used as an investment. Financial and asset protection is the reason to buy life insurance. The historical rate of return found in a whole life policy is lower when compare to higher risk alternatives. Whole life insurance has no time limit, tax deferral, cash value buildup and may be borrowed to you to pay future premiums or other purpose as compared to term life insurance. Unlike loans from a financial institution borrowing from your policy requires no credit check or other restrictions. The loan does need to be paid back or the policy will lapse or reduce the death benefit.