Life Insurance: Basic Varieties

Life insurance is a means of providing financially for your loved ones after your death. However, before purchasing life insurance, it is important to understand the varieties of life insurance that are available to you.

There are two basic types of life Insurance: term and cash value (permanent).

Term Insurance

Term life insurance provides protection for a specified period of time, usually from one to 30 years. A death benefit is paid only upon death during this term. Some policies can be renewed at the end of the coverage period, while some can be converted to whole life insurance without a medical exam.

Term life insurance comes in different varieties.

1. Renewable Term Insurance policies have a provision allowing renewal coverage at the end of the term without the requirement of showing evidence of insurability. The company must renew the policy even if the insured’s medical condition has deteriorated. However, it must be noted that the premium rate rises with each renewal.

2. Convertible Term Insurance policies permit one to convert (in other words, change) term coverage into a permanent policy without providing evidence of insurability. The premiums for convertible policies are usually more expensive than for nonconvertible policies. After the policy is converted, the premiums for the permanent coverage will be higher than the premiums of the term policy with the same death benefit. However, the premiums for the permanent policy will remain the same each year while the term premiums will rise.

3. Level Term Insurance policies provide a fixed premium for a certain number of years, typically 10 or 20 years, and the death benefit remains unchanged. The death benefit is the amount the life insurance company will pay, as stated in the policy, when the insured person dies. The advantage is that a certain rate for the period of the policy is locked in. The disadvantage is that the premiums usually cost more than the earlier years of the renewable policy; when the level policy expires, the premium rates will rise considerably if one wishes to renew with another level policy.

4. Decreasing Term Insurance policies have death benefits that decrease over the term of the policy. For example, coverage may start at $100,000 with the amount of coverage decreasing by $10,000 each year for 10 years. The premium usually stays the same over the term of the policy. One will pay the same premium for less insurance over time instead of having the premium increase for the same amount of insurance.

5. Increasing Term Insurance policies begin at one level of death benefit which gradually increases over the life of the policy. For example, coverage starts with a $100,000 policy and increases the death benefit $10,000 each year for 10 years. However, the premium will increase each year. This type of policy may be appropriate if insurance needs will grow in the future because your family is growing.

Permanent (Cash Value) Insurance

Cash value life insurance provides life-long protection as long the premiums are paid. The premiums are based on the age of the insured at the time of purchase; generally, premiums remain level and do not increase as one ages. Therefore, the younger you are when you buy the policy, the lower the premium you will pay for the life of the policy.

Permanent insurance is more expensive than term insurance because premiums remain the same. However, permanent insurance accumulates cash value, which may be refundable upon surrender of the policy. When the policy is active, cash values can be borrowed against or used to pay premiums.

You may borrow up to the cash value of a permanent life insurance policy at an interest rate (fixed or adjustable) which is stated in the policy. Any unpaid interest is added to the loan. If any part of the loan, including interest, goes unpaid, the amount will be deducted from the death benefit. One can use the cash value to pay premiums for a period of time, keeping the stated death benefit; the cash value can also be used to purchase paid-up insurance in a lesser amount with no further premiums due.

There are four basic types of permanent insurance:

1. Whole Life policies are also called life or ordinary life. It has a fixed guaranteed rate and develops guaranteed cash values. There are two kinds of traditional whole life:
   • Joint Whole Life insures two lives instead of one. It is also called first-to-die coverage, and the policy pays the death benefit to the surviving insured person when the first insured person dies. This is usually purchased by a husband and wife.

   • Survivorship Life, also known as second-to-die coverage, insures two people, but a death benefit is paid only when the second person has died. This is designed for married couples who want to provide funds to pay estate taxes that may be due after their deaths.

2. Universal Life policies have more flexibility. Within limits, the death benefit, the amount of premium and payment frequency can be changed. Unlike whole life, this is an "interest driven" policy; it normally pays a minimum guaranteed interest , but if the interest rates are continuously low, additional premiums may have to be paid to avoid a lapse of coverage.

3. Variable Life policies have death benefits and cash values that vary with the performance of an underlying portfolio of investments that are chosen. The death benefit and cash value are not guaranteed, so they can go up or down; nevertheless, there may be a guaranteed minimum death benefit.

4. Variable Universal policies have a combination of premium and death benefit flexibility of universal life and the investment flexibility and risk of variable life.

Riders are additional coverage notations that are added to a policy and are available at an additional cost. Some of the most common life insurance riders are as follows:

1. Disability waiver of premium provides for the waiver of premium, and sometimes payment of monthly income, if the policyholder becomes totally and permanently disabled.

2. Accidental death, sometimes known as double indemnity, provides for payment of an additional benefit if death is caused by an accident

Before signing on the dotted line of a new life insurance policy, be sure to discuss with your financial planner what your options are and what is best for you and your family.