If you are thinking about taking out a life insurance policy, or if you already have one and are wondering if it is the right policy for you, you may want to take a moment and evaluate the different types of life insurance policies that are available, how they work, and how they compare.
Term Insurance or Permanent Insurance
There are two main types of life insurance: term insurance and permanent insurance. Term life insurance will cover you over a certain period of time – the term – and will pay a benefit to your designated beneficiary if you die during that period. Permanent insurance policies, also referred to as “cash value”or “whole life” policies cover you for life, provide a death benefit, and contain an element of savings.
Term Life Insurance
Term policies are straightforward – you make the premium payments in return for financial protection in the form of a death benefit. The term can be anywhere from one to 30 years, and your designated beneficiary will be paid a fixed amount if you die during that period of coverage. With a term policy you are paying for just insurance, and not any investment features. At the end of the coverage period, the policy will expire (unless you renew it), and you will not be entitled to any return on the premiums you have paid.
Different types of term life insurance policies
1. Renewable Term Insurance
You can renew your coverage at the end of the term. In some cases you may be required to take a medical examination in order to continue your coverage and obtain the least expensive rates. In other cases, a medical examination may not be required and your coverage will be guaranteed, but your premiums will be higher. Premiums generally increase as you get older.
2. Convertible Term Insurance
You can convert your term coverage into permanent coverage, without having to provide evidence of insurability. Premiums for a convertible policy are generally higher because of this guarantee. Once you convert to a permanent policy, the premiums for the same death benefit will generally be higher than what you are paying now under a term policy, but under a permanent policy the premiums will stay the same and will not increase as they would if you had to renew your term coverage.
3. Level Term Insurance
You pay a fixed premium over a certain period of time and your death benefit remains the same.
4. Decreasing Term Insurance
The death benefit decreases over the policy term and your premium may also decrease. This type of insurance is often related to the amortization of a debt, such as a mortgage.
Permanent Life Insurance
Permanent life insurance covers you for life, offering financial protection in the form of a death benefit, and a cash savings account. Permanent life insurance policies may provide flexibility in determining your premiums and death benefit, and may allow you to select a portfolio of investments. Most permanent life policies also provide for a redemption amount, or cash surrender value, and the possibility of borrowing against the cash value you have accumulated. The cash value of a permanent life insurance policy is not the same as the death benefit, and is based on the accumulated premiums you have paid and earnings from the investment of those premium payments.
Different types of permanent life insurance policies
1. Whole or Ordinary Life
Premiums and the death benefit normally remain constant over the life of the policy. You establish your death benefit and the cost of that coverage now, and it remains the same. You accumulate savings based on the dividends the insurance company pays you.
2. Universal or Adjustable Life
This type of policy offers more flexibility in that you can adjust your death benefit and your premiums as your personal financial situatuion changes.
3. Variable Life
You can select a portfolio of investments and, based on their performance, your death benefit and cash value will vary. Some policies will guarantee a certain minimum death benefit. There is an inherent degree of risk involved, depending on the type of investments you choose, that could affect your death benefit and your cash value.
4. Variable Universal Life
You can combine the features of a variable life and a universal life insurance policy by being able to select a portfolio of investments and also adjusting your death benefit and premiums.
Making the Choice
Your first step in evaluating life insurance policies is to decide what you want from your insurance. Do you want just insurance, in terms of financial protection for your family or other beneficiary, or do you want some additional features?
Aspects to Consider
Life insurance coverage depends on each person’s individual situation – age, health, earning capacity, both present and future, obligations, and dependents. The coverage you select should also be evaluated in terms of the potential beneficiary’s personal situation. The beneficiary may be your spouse, your children, your parents, a partner, or someone else. The beneficiary may be almost totally dependent on you, or may be relatively independent but you still want to provide financial protection.
And, your insurance needs may very well change during your lifetime. When you have a spouse and young children at home, your insurance needs may be different than when your children are grown up and working on their own. The idea here is to have a clear picture of what you want and expect from life insurance in order to be able to properly evaluate your options and not buy something other than what you really needed or wanted.
Life insurance is part of your overall personal financial planning. It should be evaluated in conjunction with other important aspects of your personal finances, such as savings, investments, and retirement planning.
Advantages of Term Life Insurance
· Term life insurance policies are the simplest and generally the least expensive.
· The fact that term life insurance is straightforward makes it easier to get quotes and compare rates to get the most for your money.
· Due to its lower relative cost, term life insurance can provide you with financial protection and still leave funds available for other investment options.
Advantages of Permanent Life Insurance
· You can ensure your coverage for life, without having to worry about losing coverage as you age or if your health deteriorates.
· Your premium payments build up tax-deferred equity for you in terms of a cash value, that you may be able to borrow against, or take as a cash surrender value.
· Permanent life policies may provide more flexibility in defining premium payments, the death benefit, and your portfolio of investments.
Which Type of Policy is Best for Whom
Term life insurance
Since term life policies generally provide more coverage for each dollar you spend on premiums, they may be well suited for young people, who can purchase a lot of insurance coverage at a low cost, and for families on a limited budget during the child-raising years that need a relatively large amount of protection.
Term life insurance can also be appropriate in providing financial protection until a certain financial goal is met, such as paying off a mortgage, student loans, or other debt.
Term insurance may also be a good choice for people who want the financial protection, but prefer to manage their investments through other vehicles.
Permanent Life Insurance
By guaranteeing coverage for life, permanent life policies may be the right choice for persons who want to maintain life insurance coverage throughout their lives, without regard to their age or health condition.
The flexibility offered by permanent life insurance is a positive aspect for those who want to manage their insurance coverage more closely, based on changes in their financial situation.
The cash value of a permanent life policy is an important aspect for persons who want to see some type of return on their investment in insurance premiums.
The ability to borrow against the cash value can be a beneficial aspect when your economic situation changes and you find that you cannot afford to make the premium payments, but want to maintain your coverage. This feature also gives you the capacity to borrow without having to go through credit checks, since the loan is secured by the cash value of your policy. But keep in mind that borrowing against the cash value, or redeeming part of it, may decrease your death benefit unless you subsequently pay the loan, including interest, back to the insurance company. So, before you suspend premium payments for any extended period of time, you should check your cash value balance to make sure it does not get used up in paying the premiums, resulting in a lapse of your coverage.