Identification

• Life insurance coverage comes in two basic forms--whole life and term. Term insurance will pay out a death benefit as long as premium payments are made towards the policy. Policies remain active for a specified period of time and must be renewed to remain active. According to the Senior Journal, whole life plans are designed to build cash value with each successive premium payment, as well as pay out a death benefit amount. These policies remain active for the life of the policyholder.
  
  

Function

• According to the New York State Insurance Department, the cash value option provided by whole life plans adds a savings feature onto the insurance benefit. Since monies are invested for the duration of a person's life, it takes on a tax-deferred status for as long as the policy remains active. This applies to interest amounts earned as well. The only time interest or dividends are taxed is when they exceed the amount in premiums paid. The distinguishing feature in these policies is their "whole life" status, which assumes the monies will be invested over a long period of time.
  
  

Types

• Whole life policies can be participating or non-participating in terms of whether dividends are earned or not, according to the New York State Insurance Department. Non-participating policies don't pay dividends, which means premium amounts are lower and remain the same throughout the life of the policy. The dividends provided with participating policies can be paid out in different ways. Policyholders can opt to purchase additional coverage with accumulated monies or they can be applied toward future premium payments. Dividends can also be paid out in cash. Not surprisingly, participating policies can be more expensive and there's no guarantee on interest earnings.
  
  

Premiums

• Each premium payment made towards a whole life policy is portioned, meaning a certain amount goes towards insurance protection and a certain amount goes into savings. According to the New York State Insurance Department, these portions may vary throughout the life of the policy and can be set up according to a schedule at the outset. Individuals can also opt to purchase a single-premium payment policy, which is basically one lump sum amount that acts as a savings vehicle as well as a future death benefit.
  
  

Cash Value

• The built-in cash value feature provides added benefit in terms of what a whole life policy can do, according to the New York State Insurance Department. The cash value is different than the actual face amount of the policy in that it accumulates over time, whereas the face amount represents the actual death benefit payout. Policyholders have the option of borrowing against accumulated cash value. Cash value can also be used to purchase a single-premium payment policy, or it can be applied towards a term life policy.