Types of Life Insurance
Term Life Insurance – provides coverage for a set period of one or more years
These policies pay a death benefit if you die during the policy’s active term. Term insurance generally represents the best value, or the largest insurance protection for your premium dollar. These policies typically do not build up cash value. You can renew most term insurance policies for one or more terms even if your health changes. Each time you renew your policy for a new term, premiums may increase. Ask your advisor what premiums will be if you continue to renew your policy. Also, ask if you will lose the right to renew your policy at a future age.
For a higher premium, some companies will give you the right to keep your policy in force for a guaranteed period at the same price each year. At the end of this period, you may need to pass a physical examination to continue coverage, and your premiums may increase. You may be able to trade your term insurance policy for a cash value policy during a conversion period – even if you are not in good health. Premiums for your new policy will be higher than your historical premiums for your term insurance.
Cash Value Life Insurance – is invested by the insurance company and builds cash value
Cash value policies have higher premiums in the beginning relative to the same amount of term insurance. The part of the premium not used for the cost of the insurance is invested by the insurance company and builds cash value that can be used in a variety of ways. You may take out a policy loan and borrow against your policy’s cash value. If you don’t pay back the loan and interest, the amount you owe will be subtracted from the benefit when you die, or from the cash value if you stop paying premiums and take out the remaining cash value.
You can also use your cash value to keep insurance protection for a limited time or to buy a reduced amount without having to pay more premium. You also can use the cash value to increase your income in retirement or to help pay for needs (like a child’s tuition) without canceling your policy. However, to build up this cash value, you must pay higher premiums in the early years of your policy. Cash value life insurance may be one of several different kinds of policies; universal life and variable life are both types of cash value insurance.
Whole Life Insurance – covers you for as long as you live if you pay premiums
With this type of policy you generally pay the same amount in premiums for as long as you live. When you first take out a whole life policy, premiums can be several times higher than you would pay initially for the same amount of term insurance. However, whole life premiums are often smaller than premiums you would eventually pay if you were to keep renewing a term life policy into your later years.
Some whole life policies let you pay premiums for a shorter period, such as 20 years, or until age 65. Premiums for these policies are higher since the premium payments are made over a shorter period.
Universal Life Insurance – is a flexible policy that lets you vary premium payments
Universal Life policies also allow you to adjust the face amount of coverage (or the policy’s payout value). Increases may require proof that you qualify for a new or updated death benefit. The premiums you pay (minus expense charges) go onto a policy account that earns interest. Charges are deducted from the account.
If your yearly premium payment plus the interest your account earns is less than the charges, your account value will become lower. If your account value continues dropping, eventually your coverage will end. To prevent this, you may need to start making premium payments, increase your premium payments, or lower your death benefit. Even if there is enough in your account to pay the policy premiums, continuing to pay premiums will mean you build more cash value in your policy.
Variable Life Insurance – features a death benefit and cash value that depend on the investment performance of one or more separate accounts
Typically, variable life policies are invested in mutual funds or other investments. Be sure to get the prospectus from the company when you are buying this kind of policy and study it carefully. You will have higher death benefits and cash value if the underlying investments do well. Your benefits and cash value will be lower or may disappear if the investments you chose did not do as well as you expected. You may pay an extra premium for a guaranteed death benefit.
To learn more please review to the National Association of Insurance Commissioners’ Life Insurance Buyer’s Guide – NAIC Life Insurance Buyer’s Guide