When you buy ordinary life, both your policy and your premium payments are divided into two parts: risk protection and investment. The risk part represents term insurance. The investment part represents your savings account in the policy and forms a cash value. During the early years of your policy, much of your premium goes toward risk and the "loading" cost of putting the policy in force. Over time the cash value rises, the risk cost decreases, and a larger share of the premium is consequently added to the cash value, which has a built-in annual earning factor. The buildup of the cash value is free of income tax during the existence of the policy. This value may be used as a potential source of investment capital. When you terminate a policy and take the cash value, you pay an income tax only on the amount you get back which exceeds the total amount of premiums you have paid less dividends you received.

Limited payment life is like ordinary life, except the period of premium payments is limited to a certain number of years, such as 10 or 15 years, or until you reach a certain age. After that your policy is paid up and remains in full force with no further premium payments. Premiums are often high because of the shorter payment period. Limited payment life is good for a person who has a high income in early years such as professional athletes, artists, and entertainers. If the entire premium is paid in one installment, it is called paid-up permanent life insurance.