The primary feature of a life insurance policy is the death benefit it provides. Term policies provide coverage within the time specified by the contract. After that time period, protection expires and no death benefit is paid. Permanent policies provide a death benefit that is guaranteed for the life of the insured, provided the premiums have been paid and the policy has not been surrendered.

The value of a death benefit is determined by a number of factors, including:

• The type of policy purchased  
 
• The availability of paid-up additions  
 
• Whether or not the policy has accumulated cash value  
 
• Whether or not any policy loans remain outstanding at the time of death  
 
• Whether or not the cash value has been surrendered in portion or in full  
 

The cash value of a permanent life insurance policy is accumulated throughout the life of the policy. It equals the amount a policyowner would receive, after any applicable surrender charges, if the policy were surrendered before the insured's death. The policyowner may choose to surrender the policy—foregoing protection—in exchange for the cash value.

Cash value can also be withdrawn from a policy. This may be an attractive feature should you need additional funds for a child's education, a down payment on a home, or retirement income, among other financial needs. However, withdrawing cash value reduces the policy's death benefit.

Many life insurance companies issue life insurance policies that entitle the policyowner to share in the company's divisible surplus. A surplus occurs when premiums plus investment income equal more than a company's operating expenses, claim costs, guaranteed increases in policy cash values and additions to surplus.

Individual policyowners share in the company's surplus by receiving dividends. Dividend illustrations show policy values, including dividends, over a period of time into the future. It is very likely that a company will experience change after a dividend scale is determined. Since future dividends would have to be adjusted to reflect this change, it is very likely that actual dividends received by the policyowner will differ from the illustration. Dividends are not guaranteed.

Generally, policyowners have one or more of the following options with the dividends they receive:

• Receive the dividends as cash  
 
• Leave the dividends with the company to earn interest  
 
• Use the dividends to help pay premiums  
 
• Buy additional paid-up insurance  
 
• Purchase term insurance  
 

Dividends paid to a policyowner of a participating policy can be used in numerous ways, one of which is toward the purchase of additional coverage, called paid-up additions. Paid-up additions accumulate cash value and dividends used to purchase paid-up additions are not considered income subject to income tax.

If used effectively, a policyowner can substantially increase the value of a policy by using paid-up additions. For a hypothetical example, say you own a $90,000 policy and pay $1,100 per year in premiums. You receive annual dividends and use them to purchase paid-up additions. Every year those dividends purchase additional coverage so that in 10 years, you may have increased your coverage to $100,000 without incurring any additional out-of-pocket expense.

Additionally, you have accumulated cash value on that additional coverage incrementally over those 10 years. All told, you paid $1,100 in level premiums for ten years, but realized an increase in coverage of $10,000.

Some life insurance policies allow a policyowner to apply for a loan against the value of their policy. Either a fixed or variable rate of interest is charged. This feature allows the policyowner an easily accessible loan in times of need or opportunity.

Keep in mind that while you have a loan outstanding on your policy, your eligibility for dividends may be reduced. Also, should you need to terminate or surrender the policy while a loan is outstanding, the death benefit and cash value are affected. The tax status of the benefit may also be affected by outstanding loan balances at surrender.

When in need of temporary protection, individuals often purchase term life insurance. Ideal for situations where an increase in financial risk necessitates additional coverage, term insurance provides short-term protection.

If you own a term policy, sometimes a provision is available that will allow you to convert your policy to a permanent one without providing additional proof of insurability. This is especially valuable to people who believe they will need insurance coverage beyond the time period of their term contract.

Policies with this feature usually contain restrictions as to how the conversion occurs. Often there are specific time frames in which you are allowed to convert. Your contract will usually specify to which permanent policies you are allowed to convert.

Waiver of Premium is an option or benefit that can be attached to a life insurance policy at an additional cost. It guarantees that coverage will stay in force and continue to grow, even if the policyowner cannot continue to make payments, due to an accident or illness.

Should the owner of the policy become disabled as defined by the insurer, he will not be required to pay premiums on a life insurance policy that includes a waiver of premium benefit. The insurer will usually continue to make premium payments on behalf of the policyowner while the disability continues. When the policyowner is no longer disabled, he must resume payment of premiums and is not indebted to the insurer for premiums paid while disabled.

When you purchase protection through a life insurance policy, you usually have a person or a group of people in mind to protect. Naming these people as the beneficiaries of your policy accomplishes this goal.

Throughout your life, you may need to change your beneficiary designation to include additional people or possibly eliminate some. This task is your responsibility and if you fail to do so, an outdated designation may leave someone important to you unprotected.