Life insurance comes in two main flavors: term and permanent. A term insurance policy provides coverage for a fixed number of years, such as 10 or 20 years, and then the coverage stops. If you aren't dead by the end of the term, the policy never pays. Permanent insurance will stay in effect until you die at whatever age or you can surrender the policy before death and receive a cash surrender value. Permanent insurance comes in two types: whole and universal life.
Whole Life Insurance
Whole life is the traditional form of permanent life insurance. This type of insurance has a fixed annual premium, and the insurance company guarantees to pay the death benefit for a death at any age. The cash surrender value of this type grows over the years, and typically at age 100 the cash value is equal to the policy face amount. The guaranteed surrender value schedule will be listed in the policy paperwork. With a participating whole life policy, the insurance company may pay dividends, which are often retained in the cash value, allowing the surrender amount to grow faster and larger than the guaranteed surrender values.
Universal Life Insurance
The amount of premium you choose to pay on a universal life policy is flexible. With this type of policy, part of the paid premium goes to cover the cost of insurance coverage, and the rest goes into an interest earning account. The goal is to build the cash value account so that the interest earnings offset the higher death benefit costs as you age. With a universal life policy, the annual statement will show how much of the premium paid went to insurance costs and how much to the savings side of the policy. A total cash value, surrender value and current interest rate will also be listed on the statement.
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