What is Traditional Life Insurance?

Traditional life insurance was one of the first life insurance products on the market. It was often sold in very small amounts by representatives that waited on the outside of the factory gates on payday or went to the clients' homes to collect premiums each week or month. Other types of representatives sold larger policies to business owners or wealthier clients, which were the same traditional policies, only in larger amounts.

Cash Value

Traditional life insurance has a cash value that increases each year you pay premiums. A chart on the inside of the policy shows the guaranteed amount of cash value.

Loans

The insurance company allows you to borrow from the cash value but you have to pay interest on it. You never have to pay the loan back but it comes off the policy's face value at your death.

Dividends

Some traditional life policies are participating, meaning they issue dividends. The IRS considers these a return of premium and you pay no tax.

Taxes

The IRS doesn't tax death benefits from a traditional life insurance policy. Like any other policy, the beneficiary receives the benefit income tax free, and often state estate tax free.

Beneficiary

The owner of the policy names the beneficiary and can change it whenever she wants. Just because you're the insured, it doesn't mean you're the owner.

Premium

The premium on traditional life insurance is level throughout the life of the policy. Modified versions may have a lower initial cost.