Types of Life Insurance

Term Life — is one of the most commonly used types of life insurance policies. It generally provides protection for a stated period of time, which can be any period from 1 to 30 years. Term policies are well suited for use when there is a limited time needed for protection and when limited dollars are available for coverage since it can be purchased in large amounts for a relatively small initial premium. During the term period, called the level-premium period, your premiums are guaranteed not to change. Term insurance can help protect your beneficiaries against financial loss resulting from your death. If the insured dies while the policy is in effect, the policies beneficiaries will receive the amount of the death benefit, generally income tax free. Term policies do not build cash value. The premiums for these types of policies are significantly lower than the costs for permanent life policies such as whole life or universal life, but do provide more insurance protection per dollar spent than permanent policy.

Term policies typically have additional common features:

Annual Renewable feature: This policy provides protection for one year, but allows the insured to renew the policy for successive periods thereafter without having to furnish evidence of insurability. This can be an advantage of annual term life coverage as you get older or if you become ill. Even if you no longer meet a company’s underwriting criteria, the company must still renew your policy. However, you must renew your policy each year and premiums will go up as the likelihood of death increases. This is in contrast to level term policies which sets a term length such as 15 years and spreads the risk to the insurer across the entire term, allowing your premiums to stay constant each year of the term period. Annually renewable premiums can become extremely high for people past middle age. If you’re paying high annually renewable premiums, it might be wise to consider another type of coverage to lock in a premium with a longer term.
Convertible feature: The option to convert the policy, which means you can convert your term policy to a permanent policy without having to take a new medical exam or go through the underwriting process. Term conversion provisions differ, depending on the policy. The period of time during the term in which you have to convert or to what age you may request a conversion may take place will differ with each policy and life insurance carrier. You can convert the term policy for a permanent life insurance policy of equal or lesser value. For example, you could convert a $250,000 convertible term policy into a $150,000 permanent policy without going through the underwriting process. Questions about your health or medical history will not be required. The new permanent policy premium, in this case would be based on the $150,000 death benefit, however, converting a policy will typically increase your premium because cash value coverage usually costs more than term life and is based on current age. Convertibility can be an important feature if your health worsens and you can’t qualify for additional term or a permanent policy in the future. Converting a term life policy to a permanent policy can also allow you to use your policy to build savings through potential cash value buildup in the policy.
Level Term: This policy has an initial guaranteed premium level for the entire specified period; the longer the guarantee, the greater the cost. Level term life insurance sets a term length and averages the insurance risk across the entire term, allowing your premiums to stay constant year after year.
Decreasing Term: This policy has a level premium, but the amount of the death benefit decreases with time. You may want to opt for decreasing term life insurance in which promised benefits decrease year after year and are in relation to your decreasing need for financial protection. This is often used in conjunction with mortgage debt protection.
Term Ladder Strategy: A strategy that can reduce costs of life insurance in your later years. Set up a term ladder coverage strategy where the amount of coverage is greater in the earlier years of a policy and then coverage amounts and therefore premium cost is reduced in later years at a point in time when the financial protection needed is not as high, such as when children’s education is no longer an issue.
Term expiration: When a term policy expires, those temporarily insured with term coverage must be aware that once the term coverage expires, they will be uninsured unless they have made a plan to secure a new life insurance policy. Some policies give you the option of converting your term life insurance to a permanent insurance policy. Unless you're sure you'll be financially independent at the end of your life insurance term, you need to include a back-up plan into your life insurance strategy.

Return of Premium(Term) Return of premium (ROP) is a form of term life insurance. It performs the same function as typical term policies accept with one substantial difference. It features an interesting twist that might be of interest to some policy holders. A ROP policy can return an amount equal to the premiums paid during the coverage when the level premium period ends, if the policy holder is still living and has kept the policy in force.

For example, if you purchase a 20 or 30 year term policy and you are still alive at the end of that term period, you could qualify to get back all the money you paid in monthly premiums and use that money to invest or as you see fit.

Whole life insurance is a type of permanent insurance. Unlike term, you purchase the policy to cover your "whole life", not just a set period. The Premiums remain level throughout the life of the policy, The premium payments are used to pay for the death benefit, the company’s administration and overhead costs and profit. These premiums however, are more than is necessary to pay for the associated costs of the policy. The excess payment is credited to your cash value account. This cash value account allows the insurance company to charge a level, guaranteed premium and to provide a death benefit and cash value throughout the life of the policy. The cash value account is guaranteed and held in the insurance company's general account. You have no say in determining how the investment portion of your premium is invested, as is the case with other types of permanent cash value life insurance policies. With certain policies the cash value can potentially grow beyond its guaranteed amount through the payment of dividends. The cash value grows tax deferred and can either be used to borrow from the insurance company or be directly accessed through a partial or complete surrender of the policy. Note that a policy loan or partial surrender will reduce the policy's death benefit, and a complete surrender will terminate coverage completely. If you live to the policy's maturity date, the policy will "endow," and the insurance company will pay the accumulated cash value (equal at maturity to the death benefit) to you. Whole-life insurance remains effective your entire life unless you cash the policy in or stop paying premiums. You never have to renew.

Why buy whole life insurance? It's easy to understand. The payments are the same every month and some whole life policies can be completely paid up after a certain number of years depending on the way the policy is structured. Because your policy earns a fixed rate of interest, it's easy to predict the growth of your cash value over time. Whole life insurance is meant to be a long-term investment type of coverage with little flexibility, so best to make sure your ability to make premium payments consistently over the life of the policy is considered. Whole life may be more predictable and dependable than other types of permanent life policies, but it has very little flexibility in regard to its structure, premiums or death benefit modifications. It is not designed to be customized. Whole life insurance builds account value based upon a set schedule. You'll know the exact cash value of your policy on each policy anniversary. With whole life insurance, your premium payments remain the same over the life of the policy, but you can choose how often you'd like to make premium payments – annually, semiannually, quarterly or monthly.

Some firms share investment proceeds with policyholders in the form of a dividend, known as participating policies. Many companies will offer "a relatively low guaranteed rate of return," but in actuality pay at a rate in excess of the guarantee due to the dividends paid. You can usually choose whether to get the dividend in cash, add it to your policy’s cash value to purchase additional death benefits, or use it to pay future premiums. Dividends are not guaranteed. Some policies don’t pay dividends at the company’s projected rate and others might be higher than the projection.

Universal Life also known as flexible premium or adjustable life is permanent insurance that provides financial protection in case of death, in addition to the potential of creating savings in a cash value component. The cash value created is based on several factors including the amount of premiums paid in over time, the declared interest crediting rate, and the policy charges deducted by the insurance carrier. The cash value is held in the insurance company's general account, similar to whole life; you don't get to choose how the account is invested. The company chooses the investment vehicle, which is generally restricted to bonds and mortgages. Cash values earn an interest rate that is set periodically by the insurance company and is generally guaranteed not to drop below a certain level. The investment and the returns go into the cash-value account, which you can use against premiums or allow to build up.

Unlike term or whole life, universal life permits substantial flexibility in the amount and timing of premium payments within limits depending on how the policy was initially structured. There is also some flexibility to adjust the death benefit based on your changing needs and requirements, (again, within the limits set out by the policy). The policy will generally provide very broad premium guidelines (a minimum and maximum premium payment), but within these guidelines you can choose how much and when you pay premiums. Note that reducing or increasing premiums will impact the growth of the cash value component and possibly the death benefit. Be aware, however, that if you want to raise the amount of coverage, you'll need to go through the insurability process again, probably including a new medical exam, and your premiums will increase.

Universal life policies reveal all aspects of the policy's cost structure, including the cost of insurance (the portion set aside to pay claims) and expenses. This information is not always available with other types of policies.

In a universal Life policy, you decide how much you want to put in over and above a minimum premium required. This will be a substantial factor in determining the cash value buildup. A feature of universal life is the option to add the accumulated cash value amount to the face amount when the death benefit is paid. This election must be made at the time of application and the increased benefit is reflected in the premium calculations. For example, if you die when you have $250,000 of cash value accumulated within your $1 million face amount policy; if you elected the enhanced benefit option, your beneficiary receives $1.250 million as opposed o the 1,000,000 face amount.

Variable Universal Life insurance combines the insurance protection features of universal life with a variable life policy therefore giving you the flexibility of adjusting premiums and death benefits, along with allowing you to make the investment choices. The investment choices are in an individual subaccount allocated to the owner as opposed to the insurance company's general account. They are comprised of various investment funds within the insurance company's portfolio, such as an equity fund, a money market fund, a bond fund, or some combination of these. These policies are technically classified as securities and are therefore subject to Securities and Exchange Commission (SEC) regulation and the oversight of the state insurance commissioner. Unfortunately, all the investment risk lies with the policy owner; as a result, the death benefit value may rise or fall depending on the success of the policy's underlying investments. However, policies may provide some type of guarantee that at least a minimum death benefit will be paid to beneficiaries.

Indexed Universal Life insurance combines features of universal life with the potential to earn interest based on the increase in an equity index. You have the ability to build cash value through index linked interest options which are linked to an equity index. You can allocate a portion of your premiums to various indices such as the S&P 500 or the Russell 2000 depending on the policy provisions. There is also typically a guaranteed interest option as an investment choice. The important feature of the indexed universal life is that there is a 0% floor, meaning you have no downside risk in the account. The payment for this feature is a growth cap rate on the returns of the index linked interest options. Similar to traditional universal life policies, there is substantial flexibility in the amount and timing of premium payments and he ability to adjust the face amount within certain guidelines of the policy.

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