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§ 17.2 LIFE INSURANCE CONCEPTSPermanent insurance can be categorized as whole life, variable life, adjustablelife, and universal life.Term insurance is analogous to renting a house. One agrees to pay a regularpayment in exchange for the protection afforded by the house. Each year, thelandlord raises the rent as expenses increase. No matter how long an individualrents, he or she receives nothing back in the event of a move. With term insurance,in exchange for a “rent payment” (premium), the insurance company providesprotection (the death benefit). Each year (typically), the rent payment(premium) is increased. If the tenant (policy owner) “leaves” (cancels the insurancepolicy), he or she receives nothing back, no matter how long the premiumpayments were made.Permanent insurance is analogous to purchasing a house. The same protectionas a rented house is provided, but the monthly payments are (usually)higher. However, the monthly payments are fixed and do not increase. In addition,each month the house is owned, the value may increase (at least over thelong term). This value is called equity, which can be used during lifetime by borrowing,by using the property as collateral, or by selling the house and receivingthe net equity in a lump sum.Under a permanent insurance contract, one pays the mortgage payments(premiums) in exchange for both protection (death benefit) and equity (cashvalue). If one dies while insured, the death benefit is paid. If an individual wantsto use the cash value while alive, he or she may do so by borrowing or by cancelingthe policy and taking the cash value. Some policies also allow for withdrawalswithout borrowing or surrendering. Premium payments are generally fixedduring lifetime.To summarize, term insurance is initially less expensive, offers death protection,and does not build up any cash value during one’s lifetime. Permanentinsurance is more expensive in the early years, provides the same death benefit,and also builds cash value during lifetime.One type of permanent insurance is universal life. To understand this form ofinsurance, visualize a bucket with two spigots, one on each side. The insuranceowner deposits premium dollars into the bucket, and each month the insurancecompany turns on one of the spigots and drains off the dollars necessary to payall of the following: one month’s cost of death protection, expense charges, andadministrative charges. The spigot is then turned off, and the dollars remainingin the bucket are invested and earn interest. These excess dollars and the interestearned make up the policy’s cash value.As the owner continues to deposit more premium dollars, and as moreinterest is earned, the cash value becomes larger. At any time, one may ceasedepositing premium dollars, as long as there are enough dollars in the bucket topay for the cost of insurance, and the expense and administrative charges. Conversely,if the owner wants the cash value to build faster, he or she may paymore premium dollars.The cash value can be taken out of the policy during lifetime in three ways.First, some of the money can be borrowed at a rate of interest; if the money isborrowed, it reduces the death benefit by the same amount. The money may bepaid back at any time. Second, one can withdraw some of the money without 529