There are two basic types of life insurance: term and whole life. Term is known as “pure protection,” since it provides only a death benefit and no accumulated cash value, as a whole life policy does.
Often referred to as “permanent life insurance,” whole life coverage provides financial protection that never expires, as long as premium payments are kept current. It also provides the additional benefit of an accumulating cash value that can be accessed while you’re still alive.
With permanent life insurance policies, premiums remain level throughout the life of the policy. As you get older, however, the real cost of providing your insurance protection actually increases. To make up this difference and to allow premiums to remain level, the insurance company charges more in the early years of the policy and sets the amount over and above what’s needed to pay for the protection into a separate account. This account, which is a separate part of the policy, represents the cash value.
As the years go by, this cash accumulation may increase in value, but the cost of providing your death protection also increases. When the time comes that your level premium amount is no longer adequate to cover the cost of protection, the insurance company will subtract the needed amount from the cash value to make up the payment difference.
Guaranteed Cash Value
A permanent life insurance policy will include a stated guaranteed minimum interest rate to be paid on your cash value account. Regardless of how the economy does, you’re guaranteed to receive at least the minimum interest rate specified in your policy. If interest rates go up, the insurer may also raise your interest rate payment. No matter how low interest rates may fall, however, you’ll never earn less than the stated guaranteed interest rate.
Net Cash Value
Your policy’s net cash value is the amount of money you’ll receive at any time you cancel your permanent life policy. Every time you receive your life insurance statement, you’ll find a listing of the current accumulated cash value amount along with the net surrender value. The surrender value is usually lower than the cash value for a number of years, as part of your premiums goes toward agent commissions, office personnel salaries, lab fees, etc. Net cash value represents your cash value minus all fees, surrender charges and any outstanding loans against the policy.