5 things to know about permanent life insurance

(Money Magazine) -- 1. It's more coverage than most people need

The main purpose of life insurance is to protect your family's finances when you die. Permanent insurance does that for your entire lifetime, while also providing an investment component -- savings build within the policy, and you can tap or borrow against this "cash value."

In contrast, basic term insurance provides coverage for a set number of years for a much lower premium. At the end of the term, you typically get no cash back. But by then your kids will be grown and your house paid for, so the policy will have done its job, says insurance adviser Glenn Daily of New York.

2. It may not be your best investment

Permanent life aims to provide protection and growth. But it's usually best to seek those separately, says Daily. Because premiums on permanent are high, you may be tempted to skimp on the death benefit. (A $1 million policy for a healthy 40-year-old woman can run as much as $13,900 a year; she could get a $1 million 20-year term policy for $750.)

Plus, the policies are often so opaque that it's hard to assess the investment potential. The alternative? Buy term and invest the rest. You'll have control over expenses -- and a shot at better returns.

3. But in rare cases, it's just the ticket

The cash that builds in such policies is not taxed until it's withdrawn (and you can avoid even those taxes by taking a "loan" against the account, which reduces the death benefit). That makes permanent insurance useful for high earners who max out other tax-deferred savings, says life insurance adviser Peter Katt of Mattawan, Mich.

Because it lasts a lifetime, a permanent policy may also make sense for older people who'll have illiquid estates -- like small-business owners -- but want to pass on money. The death benefit is often greater than what they'd be able to save.

4. The right flavor makes all the difference...

There are three main types of permanent insurance: traditional whole, universal, and variable. Whole has a fixed premium and guaranteed minimum growth. Universal allows you to raise or lower your premiums and resulting cash balance. And variable lets you choose how the cash is invested.

If you think you're a candidate for a permanent policy, find an independent expert to help you pick among these. Search "fee-only life insurance" online to find pros who charge hourly fees (around $300) and eschew commissions from insurers.

5. ... because dumping a policy will cost you

It can take a decade or so before a permanent policy's cash value -- what you'd get back if you gave up coverage -- catches up to the premiums you've paid. There may also be surrender charges in the early years.

Already have a policy with cash value built up? For $80, the Consumer Federation of America will review it to see if it's worth keeping (evaluatelifeinsurance.org). Know that if you cash out, you'll owe tax on the earnings portion, unless you transfer the money to another insurance product, says Daily.