So now let’s look at the other major life insurance concept, which is the “permanent life insurance”.

The vanilla flavor: Whole Life

First, we have the common type of “whole life” insurance, also called ordinary. Why is called ordinary beats the heck out of me!

This is the most common type of permanent insurance policy. It offers a death benefit along with a savings account. If you pick this type of life insurance policy, you are agreeing to pay a certain amount in premiums on a regular basis for a specific death benefit. The savings element would grow based on dividends the company pays to you, (which is very little).

A level premium whole life insurance will provide a lifetime death benefit coverage for a level premium. These premiums are much higher than term, but because term insurance premiums rise with the increasing age of the insured, the cumulative value of all premiums paid under whole and term policies are roughly equal if the policy continues to average life expectancy. Kind of fair I think. Part of the insurance contract stipulates that the policyholder is entitled to a cash value reserve that is part of the policy and guaranteed by the company. You can use the cash value at any time through policy loans that are received income tax-free and paid back according to mutually agreed-upon schedules. These policy loans are available until the insured's death. If any loans are not paid back—upon the insured's death, the insurer subtracts those amounts from the policy's face value (the death benefit) and pays the remainder to the policy's beneficiary. And here lies the big divide. In a whole life policy, you either get a death benefit or the cash value, but never both! This argument is as old as coal. Almost.

In reality, if you open the hood of the whole life Cadillac (because it is an expensive buy dude), you will find two engines. One is a decreasing term (see above) that every year reduces the death benefit until the death benefit equals zero at age 100, while another engine, a cash value, slowly increases to where almost at any year after the first few years, the total of cash value and death benefit equals the face amount. Get it? If not, read it again. It is like saying 10+0=10, 9+1=10, 8+2=10….0+10=10.

The fact is it is a much more expensive product, but it will provide you with a benefit of your choosing no matter what. If you die at 95 and your old (really old by then) lady is still around, she will have enough cash to bury you with dignity and enough left over to finally enjoy life as she always dreamed. There is always the famous argument of “buy term and invest the difference”. Very wise indeed, for those who are wise, and disciplined, and fortunate and lucky enough to choose the right investment and the market does not crash right before they need their cash. And of course, for those that have absolutely no use for insurance after 20 or 30 years; maybe the single type that lived all most life alone, no kids no cats no dogs, just a goldfish, not even named Wanda.