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What You Should Know About Life Insurance:
Types and Definitions
Term Life Insurance
Term insurance provides coverage for a specific period of time, the term. It pays a benefit only if you die during the term.
Term life insurance does not build up cash value. The premium normally increases after the specified time period.
Some term insurance policies can be renewed when you reach the end of a specific period. This can be from 1 to 20 years. The premium rates increase at each renewal date. Many policies require evidence of insurability when you try to renew in order for you to qualify for the lowest available rates.
Permanent Life Insurance
Permanent life insurance provides long-term financial protection including both a death benefit and in some cases a cash savings. It is known by a variety of names, described below. As long as you pay the premiums, the death benefit will be there.
These policies are designed and priced for you to keep over a long period of time. If you don’t intend to keep the policy for the long term, it could be the wrong type of insurance for you.
Most permanent policies including whole, ordinary, universal, adjustable and variable life have a feature known as cash value or cash surrender value. This feature, which is not found in most term insurance policies, provides you with some options:
- Cancel or “surrender” the policy “in total” or “in part” and receive the cash value as a lump sum of money. If you surrender your policy in the early years, there may be little or no cash value.
- If you need to stop paying premiums, you can use the cash value to continue your current insurance protection for a specific period of time or to provide a lesser amount of protection to cover you for as long as you live.
- Usually, you may borrow from the insurance company using the cash value in your life insurance as collateral. Unlike loans from most financial institutions, the loan does not depend on credit checks or other restrictions. You ultimately must repay any loan with interest or your beneficiaries will receive a reduced death benefit.
The cash values of many life insurance policies may be affected by your company’s future experience, including mortality rates, expenses and investment earnings. Keep in mind that with all types of permanent policies, the cash value of a policy is different from the policy face amount.
Cash value is the amount available when you surrender a policy before its maturity or your death.
The face amount is the money that will be paid at death or at policy maturity.
Types of Permanent Life Insurance
The major types of permanent insurance are whole life (also called ordinary life), universal life (or adjustable life), and variable life.
Whole Life or Ordinary Life
This is the most common type of permanent life insurance. Whole life policies provide lifetime protection. Premiums mustgenerally be paid for as long as the policy is in force. These premium amounts generally remain constant over the life of the policy.
Universal Life or Adjustable Life
This variation of permanent insurance allows you, after your initial payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums.
You also can reduce or increase the amount of the death benefit more easily than under a traditional whole life policy. To increase your death benefit, you usually will be required to furnish the insurance company with satisfactory evidence of your continued good health.
Variable Life Insurance
Variable Life policies allow the money that remains after payment of premiums to be invested in financial vehicles of your choosing. Variable life insurance has the option of a minimum guaranteed death benefit. However, variable life insurance can be expensive and risky, depending on the type of investments made.
Death benefits and cash values of variable life policies vary with the performance of an underlying portfolio of investments.
You can choose to allocate your premiums among a variety of investments which offer varying degrees of risk and reward — stocks, bonds, combinations of both, or accounts that provide for guarantees of interest and principal. You will receive a prospectus in conjunction with the sale of a variable product.
The cash value of a variable life policy is not guaranteed, and the policyholder bears that risk. However, by choosing among the available fund options, the policyholder can allocate assets in a way that meets his or her objectives and risk tolerance. Good investment performance will lead to higher cash values and death benefits. On the other hand, poor investment performance will lead to reduced cash values and death benefits.
Some policies guarantee that death benefits cannot fall below a minimum level. There are both universal life and whole life versions of variable life.