Life Insurance can be broken into:
Term Life - Think temporary needs
Whole Life - Permanent Insurance for Life
Universal Life - Also permanent insurance but with some distinguishing features and more choices
Some information on Term Insurance.
Why It's Called "Term" .
Term life insurance is called "term" because it provides coverage for a specific period or term (most often 1, 5, 10, 15 or 20 years). For this reason, it is also called "temporary" insurance. If death occurs during the term, the policy pays cash benefits to the beneficiary. However, once the term is over, and if the policy is not renewed, the coverage ceases. If death occurs after te coverage ceases, no cash benefits are paid out.
Term insurance is the most straightforward type of life insurance and the easiest to understand. Sometimes it is called "pure" insurance, since the policy has no financial investment value and most of your premium goes to pay for coverage, with only a small amount used to pay the insurance company's costs. If you are looking for the maximum amount of coverage for your dollar, term life insurance will give you the most "bang for your buck".
Different Terms For Different Needs.
All term life insurance policies cover you for a specific amount of time - the term. The term that's right for you depends on how old your children are, how many years before you retire, and other factors. Many people like to know they're insured until they're ready to retire, usually at age 65. Many just want to have insurance until their youngest child graduates from college, and so they make sure their life insurance coverage includes money to pay for all of the college tuition.
Most experts agree that you should carry insurance at least until your youngest child is 18. So if your child is 3 now, you would want to carry your insurance for at least 15 years. But that doesn't mean you have to lock into a 15-year term - you could instead buy an annual renewable policy and renew it for 14 years in a row. You should compare the total 15-year cost of the annual renewable policy and the 15-year term policy, making adjustments for the time and value of money, to determine what the best value is for you.
Here's an overview of the different types of term policies available and, most importantly, a look at what happens when the term is over.
Annual renewable term insurance
Renewable term insurance
Level premium term insurance
Decreasing term insurance
Convertible term insurance
Renewable and Convertible Term (R&C)
Annual renewable term insurance.
With annual renewable term insurance, your policy is automatically renewable each year up to a specific age limit, often 65, but sometimes older. Since the chances of your dying increase statistically the older you get, your premiums go up each year as you renew. However, if you buy your policy when you are young and unlikely to die, you can obtain substantial coverage for an inexpensive premium.
Renewable term insurance.
With renewable term insurance, the insurance company automatically allows you to renew your coverage after the term of the policy is over (generally 5 to 20 years), even if your health has deteriorated. This is the same way annual renewable works, but for a longer period of time. Since a lot can happen to your health in 5 or 20 years, renew ability can be a valuable feature. But since it involves a greater financial risk for the insurance company, renewable term coverage generally costs a bit more than annual renewable policies.
The conditions associated with renewable term may differ from company to company. For example, though you are guaranteed the right to renew at the end of your term, you may or may not be able to renew for the same amount of coverage or for the same term. Moreover, your premiums will almost definitely go up upon renewal.
Level premium term insurance.
Level premium term insurance guarantees your premium will stay the same each year for the term of your policy, generally 5 to 20 years. Insurance companies keep your premiums the same by charging you an average of the premiums they would ordinarily charge you with an annual renewable policy. As a result, you will probably pay more in the early years and less in the later years than you would if you had an annual renewable policy. You will probably also encounter a big increase in premiums at the end of your term when you apply for a new insurance policy.
The big advantage of level premium term insurance is that your premiums stay the same throughout your policy, even as you get older. However, if for some reason you change policies in the early years - when your level term policy is most expensive - you will end up paying more than you need to for coverage.
Decreasing term insurance.
With decreasing term insurance, your cash benefits decrease each year while your premiums remain level for the duration of the term. Decreasing term is typically used to cover an item whose costs decrease over time, such as your home's mortgage. It isn't a wise choice for your general life insurance needs which, due to the effects of inflation, tend to increase over time.
Convertible term insurance.
Convertible term insurance enables you to convert your term insurance into any of the other types of insurance policies offered by the issuing insurance company. Convertibility can be an advantage if your insurance needs change over time, as they are likely to do. And, since it involves greater risk for the insurance company, it generally costs more than annual renewable term.
Renewable and Convertible Term (R&C)
This policy offers the combined features of Renewability (without evidence of insurability), and covertibility. Not only is the policy guaranteed to be renewed, it can also be converted to permanent insurance at a set time. This policy offers great flexibility.
What Happens When The Term Is Over?
It all depends on the type of term insurance you have. With renewable term, you are guaranteed the right to take out another term policy without the formality of a new application or medical examination. With standard term, your insurance coverage ceases, and you have to apply again, including taking a medical examination. With convertible term, you reserve the right to convert your term policy to another type of policy like Whole Life Insurance or Universal Life Insurance- or in some cases, another term policy - at any time during the term of your policy. You should, however, expect an increase in your premiums with your new policy.
Summary: Advantages Of Term Life Insurance: WHAT IT DOES
- It pays a death benefit to the beneficiary you name.
- It will cover your final expenses and provide a lump sum for your dependents.
- It covers you for the full amount of life insurance you choose.
- It can be convertible and renewable depending on the policy.
- It gradually increases annual premium as you get older.
- It traditionally works well to meet temporary insurance needs.
Disadvantages of Term Life Insurance: WHAT IT DOESN'T DO:
- It doesn't provide a cash value account for some later point such as retirement.
- It doesn't provide you permanent life insurance protection.
As the name implies, whole life insurance covers the policyholder for his or her whole life. There is no fixed end date for the policy, as there is with term life insurance. When the policy holder dies, the face value of the policy, known as a death benefit, is paid to the person or persons named in the life insurance policy (the beneficiary or beneficiaries).
The cost of a whole life insurance policy is spread out across many years, so the premium remains the same. This ensures that older people on a fixed income will not have to cope with rising premiums.
Unlike term life insurance, whole life insurance accrues cash value over time. If you cancel the policy after a certain amount of time has passed, the insurance company will surrender the cash value to you. The cash value is scheduled to equal the face value when the policyholder reaches the age of 100. If you live that long, the insurance company will likely pay the face value to you in a lump sum.
This is not the only way to use the cash value, however. You can also borrow some of the cash value as a loan. The money has to be paid back, but there is no approval process and no risk of being turned down. You are your own lender. Some whole life insurance pays dividends, so it can be used to supplement your retirement income.
Universal life insurance offers many features of whole life insurance, but allows greater flexibility once the policy is in force. Like whole life insurance, universal life insurance is a permanent policy. It protects the policyholder until death—however long that may be. Also like whole life insurance, universal life insurance accrues cash value over time.
Unlike whole life insurance, universal life insurance breaks the death benefit and cash value accumulation into separate components. This allows the policy holder to make changes in the policy. For example, if the policyholder wants to increase the death benefit, he or she puts more of the premium money into the insurance account and less into the cash value account. The reverse is also true. The policyholder can decrease the death benefit and increase the cash value contribution. To reduce premiums, the policyholder can pay only the insurance portion. Universal Life also offers a choice of death benefits which are not available with whole life policies.
Once the cash value has accumulated, the policyholder can withdraw the money. The money must be paid back, or else the death benefit will be decreased. Some people use the universal life insurance policy as a savings account to draw on as they get older. Others use the accumulating cash value to increase the death benefit so they have more to leave their loved ones. Universal life allows these choices and decisions to be made throughout your lifetime.
With Universal Life, you also have the most flexiblity with your investment choices. The policyholder can have control over the investments the account value is invested in. Choices of traditional investments, along with mutual funds and segregated funds are available.
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