Types of Life Insurance Explained
Term life insurance provides life insurance for a limited period of time. It is for a specific term or number of years. If the insured dies within that period, the beneficiary receives the death payments. However, if the insured survives the specified term of the policy, the policy simply ends.
Term life insurance generally offers the largest protection for your premium dollar. The reason is that generally term life insurance policies do not build up any cash value. Most term policies are "level term" policies which means that the death benefit and premium remain the same for the entire length of the contract.
A couple of important factors to consider when researching term life insurance policies are renewability and convertibility. Almost all term life policies contain the option of renewability. At the end of the term, the policy can be renewed for a limited number of additional years without a medical exam. The premium will normally increase with each renewal. Renewal rates may become quite expensive. Renewability may be an important factor to an insured person who has recently had a serious decline in health.
Convertibility is another option on a term life insurance policy. Convertibility is simply the option to convert a term life insurance policy into a permanent life insurance policy without evidence of insurability, which means no new medical exam. Most commonly, convertibility is allowed on an "attained age" basis, which allows you to purchase a new permanent life insurance policy at the premium rate of your current age.
You may be able to convert all or just a portion of term life insurance policy before the end of the term period. The benefit of the convertibility option is that you can get a larger life insurance amount when you are younger and have a greater need for life insurance and can then convert some of that to permanent insurance to provide for final expenses or estate taxes.
Unlike term life insurance, permanent life insurance remains in force for the full life of the insured as long as the premium payments are made in accordance with the policy provisions. Typically, permanent life insurance has a cash value. The two primary types of permanent life insurance are whole life and universal life.
Whole life insurance provides coverage over the insured's lifetime, not just a portion of the insured's life. Since most whole life companies charge premiums based on the assumption that everyone would be dead by age 100 or now age 121, the company pays the policy face amount to those who attain age 100 or now age 121. This is starting to change as people are living longer.
Premiums for whole life insurance will stay "level" throughout the policy. Since premiums are based on age, the younger a person is when the policy is purchased, the lower the premium will be throughout the life of the policy. The death benefit also remains the same. There are forms of limited pay policies where premiums are paid for a certain number of years or to a certain age. If you choose one of these, the premiums will be higher than if you paid premiums until age 100.
A very important aspect of whole life policies is that they have a cash value. This means that a whole life insurance policy has a savings aspect for the insured. A portion of each premium payment goes into the cash value. The policy owner can access this money in a number of ways. Whole life policies have to contain a schedule that shows the owner the minimum value he can receive if he decides to surrender the policy.
A "surrender" is not the only way to access the funds. Loans can be taken out on the policy up to the cash value, however interest is charged for this loan, which can be repaid at any time. If the policy is surrendered, or the insured dies, the loan is deducted from the cash value or face amount. Cash value can be considered an asset and used as collateral in a loan.
Universal life insurance is a flexible premium adjustable life insurance policy that has an initial premium and flexible premiums afterwards. The policy holder can select the future amount and the frequency of his premium payments, within limits, and can stop and start premium payments. It is important to be aware of the account value in these policies to be sure there is always enough there to keep the policy in force.
As premium payments are made on a universal life insurance policy, they accumulate within the policy at a fixed rate of interest and create an account value. This interest rate is determined by the company and changes periodically, and cannot go below the guaranteed minimum interest rate stated in the policy. Each month, expenses are deducted from the account value. The different between the premiums paid in, plus the interest credited to these funds, less the policy expenses (cost for insurance and fees), equals the account value.
Universal life insurance policies can be written in such a way that specified premiums will guarantee a specific death benefit very much like whole life but at a lower premium. The difference is that in this case, the universal life policy will not build as much cash value as the whole life policy. If you are not using your life insurance as a savings vehicle, then a large cash value may not be important to you.
It is important to reevaluate your life insurance every two to three years to ensure it is still accomplishing what you need it to do. Our situations change as we age and our insurance needs may change as well. There is really only one final question, "if you died today, would your plan be ready?" Allison Harris can help you ensure you have the proper plan in place to ensure that your family is taken care of.