As you shop around and start talking to companies or insurance agents, you may hear about different kinds of term life policies. They all provide a specific benefit over a specific term but may have very different bells and whistles and varying costs.
LIFE INSURANCE
Term Life Insurance
Term life insurance policies offer coverage for a specified amount of time, typically anywhere from one to 30 years depending on your age. Term life insurance offers a death benefit, which is intended to help your beneficiaries replace your income if you pass away.
LET'S LOOK AT THE TERM LIFE OPTIONS:
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Level premium: Also called level term, this is the simplest, most common type of policy. Your premium stays the same for the entire term. After your level term period the premium increases substantially.
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Yearly renewable term: Also called an annual renewable term. This policy covers you for a year at a time, with an option to renew without a medical exam for the duration of the term – but at a higher cost each year. Compared to a level term policy, your premiums will be slightly lower at first, but over a full 10-, 20-, or 30-year, term you will pay more than you would with a level premium policy.
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Return of premium: This type of term policy actually pays back all—or a portion of—your premiums if you live to the end of the term. What’s the catch? Your premiums will be approximately two times higher than with a level term policy. Also, if your financial status changes and you let the policy lapse, you may only get a portion of your premiums returned or nothing at all.
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Guaranteed issue: These policies are easier to get because they don’t require a medical exam and only ask a few simple health questions at most. This also means that the insurance company has to assume that you are a risky prospect who has health issues, therefore, your premiums may be much higher than they otherwise would be. In addition, the policy may not pay a full death benefit for the first few years of coverage. The maximum death benefit for these policies is usually $25,000. Some companies offer up to $50,000 of coverage. If you have health issues but are able to manage them, it will usually be worthwhile to secure a conventional term life policy that is underwritten (i.e., requires a medical exam).
Note: Convertibility is a policy provision that lets you change your term insurance into a permanent whole life policy later on – without having to get a new medical exam (normally year before the term period ends). It’s a feature offered by almost all major insurance companies that let you convert your type of life insurance.
WHY WOULD YOU CONVERT TO A WHOLE LIFE POLICY FROM TERM?
If you’ve had a serious health problem – for example, a heart attack – it may be very difficult to get another policy. Another reason: you’re attracted to the cash value component of a whole life policy. Or maybe you want permanent life-long coverage. While a term policy just may be your best option now, things can change.
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You may be drawn to the cash value component of a whole life policy.
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You suffer a serious health problem such as a heart attack, a cancer diagnosis, and cannot secure another life insurance policy.
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You want permanent life-long coverage.
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Your survivors will likely never collect on your term policy.
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Financially, you are more solvent than when you bought your term life policy.
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You prefer that your premiums remain unchanged for the rest of your life.
When might a whole life policy make sense for you?
A whole life insurance policy might be a fit for someone who likes predictability over time. This is because whole life insurance offers death benefit guarantees and fixed premiums.
If you have a young family, you will need many years of income to feed, house, clothe, and educate your children through adulthood. If you’re not there to provide for them, life insurance can help with those costs. But, it's up to you to ensure that your policy's death benefit is enough to do so.
This chart provides a general guide to the amount of coverage needed.
Whole Life Insurance
WHAT ARE THE BENEFITS OF WHOLE LIFE INSURANCE?
Certain aspects of whole life insurance can make it an appealing choice.
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Your premiums are fixed and will never go up, regardless of market conditions.
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You may be able to withdraw funds or take out a loan.
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Your death benefit is guaranteed as long as you make the required premium payments.
Whole Life insurance provides fixed premiums and fixed death benefit. In most cases, the premium and death benefit stay constant for the duration of a whole life insurance policy. Because whole life insurance gives you fixed premiums and a fixed death benefit, you won't have to worry about increased premiums as you get older. And, your loved ones will also know how much to expect when your life insurance benefit is paid out after you pass away.
If the insurance is a "mutual company," your whole life policy will pay dividends as well. These dividends represent participation in the profit of the company but are not guaranteed.
A whole life policy can serve as a source of emergency funds for you if something goes wrong, or you may be able to take out a loan against the policy. That's because a portion of each premium payment you make is funneled into a savings component of the policy called the "cash value."
Over time, the cash value of your policy increases, and you may have the option to withdraw funds or borrow against it. The rules on how and when you can do this vary by company and policy. Your insurer may also offer guidelines to follow so that you don't inadvertently reduce the policy's death benefit or create a tax burden.*
*Loans or partial withdrawals can reduce the policy's cash value and death benefit, can increase the possibility of policy lapse, and may result in a tax liability. Consult a tax adviser for additional information on the tax treatment of loans or withdrawals from a life insurance policy.
If you want to build tax-deferred savings and don't expect to tap into the funds for a long time, universal life may be a suitable option for you. The cash value option that's part of a universal life policy may be available for you to withdraw or borrow against in an emergency.
Universal Life Insurance
WHAT ARE THE BENEFITS OF UNIVERSAL LIFE INSURANCE?
Beyond lifelong protection, there are a few additional features of universal life insurance:
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You can withdraw money or borrow against the policy's cash value.
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Your cash value earns interest.
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You have flexibility with premiums.
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You can adjust the death benefit.
When you pay your premium on a universal life insurance policy, a portion of each payment goes toward paying for the death benefit. Another portion also goes to building up the policy's cash value. Over time, after money has accumulated, you may be able to withdraw or borrow against the cash value of the policy. The rules on how and when you can do this vary by insurance company and policy. However, it's important to know that this may reduce your death benefit, create a tax liability, or even cause your policy to lapse.
The cash value of a universal life policy generally earns interest that's in line with current money market rates, says the Insurance Information Institute (III). Of course, it's important to note that the interest rate will fluctuate along with the market, which means the interest you receive may also go down. Some companies offer protection against that with a minimum performance guarantee on the policy.
If the cash value of your account can cover the costs, you may have the ability to lower or stop paying your premiums on a universal life policy for a certain amount of time. This can be helpful if money becomes tight and you're looking for ways to lower monthly bills. However, there can be negative consequences as well. For instance, your coverage may end if you use up the account's cash value to pay for premiums. Keep in mind that you must continue paying premiums to keep your policy in force. If you don't pay your premiums, your policy will lapse (meaning you no longer have coverage). If you can't pay a premium on time, your insurer may offer a grace period — a specified amount of time in which you have to make up a missed payment before coverage lapses. Read your policy or check with your agent for more information.
The flexibility of a universal life policy also extends to the death benefit. At some point, you may want to increase the amount that's paid out upon your death. This is something some insurance companies allow, as long as you pass a medical exam. Likewise, you might choose to reduce the death benefit, to reduce the cost of the policy. Remember that if you increase the policy's death benefit, it may increase the premium you pay.
INDEXED UNIVERSAL LIFE (IUL) insurance policies can help you to build wealth while leaving behind a death benefit for your loved ones. These policies put a portion of the policyholder’s premium payments toward annual renewable term life insurance, with the remainder added to the cash value of the policy after fees are deducted. On a monthly or annual basis, the cash value is credited with interest based on increases in an equity index. While IUL insurance may prove valuable to some, it’s important to understand how it works before purchasing a policy.
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Indexed universal life (IUL) insurance policies provides greater upside potential with no down side
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Flexibility, and tax-free gains
Most new life insurance policies have "Living Benefits" called Accelerated Benefits Riders that can provide an advance of your policy's death benefit to help cover the costs of care, recoup lost income or any other purpose should you have a qualifying chronic, critical or terminal illness or condition.