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The Basics of Life Insurance Types of Life Insurance Life insurance helps protect families by replacing lost income if a wage earner dies. Some policies also accumulate cash value, and can provide payments during the policyholder´s lifetime. When purchasing life insurance, you should consider your individual circumstances and the standard of living you want for your dependents. All life insurance policies are either "term" or "permanent" plans or a combination of the two. Term life policies cover you only for a specific period of time - usually for one, five, 10, 15, or 20 years - or until a specified age, such as 65. Most term life policies provide only a one-time payment to your beneficiary for the amount of the policy if you die. This payment is called a death benefit. Because they usually have no savings feature, term life policies generally are less expensive and easier to understand than cash value life policies. Except for people past middle age, term life policies usually offer the best value for your money by giving you the biggest death benefit for your premium dollar. The price of a term life policy increases as you grow older. At the same time, your insurance needs may decrease as children grow up and savings and investments increase in value. Renewable and Convertible Policies Since term life policies expire at the end of the term, you should look for a renewable policy. A renewable policy allows you to continue your insurance for additional terms regardless of your health and without having to pass a medical exam. This is an important advantage because it may be harder for you to pass a physical exam as you grow older or if you become ill. It´s important to remember that you will have a new contestable period each time your policy renews. During the contestable period, a company can deny payment of a claim because of suicide or material misrepresentation on the application. Most term insurance policies are convertible. This means that as your insurance needs change, you can exchange your term life policy for a cash value policy without taking a medical exam or answering health questions. You may choose to convert your term life policy if your health declines and it becomes difficult to qualify for a new term policy at standard rates. You also may convert your term life policy if you decide to use insurance as a way of accumulating funds instead of providing only death benefits. Insurance companies usually allow conversion until age 65. Permanent life insurance policies provide a death benefit and a way to accumulate funds over time. The primary purpose of the life insurance policy is to provide permanent life insurance protection, not to be a savings or retirement plan. Permanent life policies differ from term life policies in several ways. These include: Higher initial premiums. You pay not only for a death benefit but also for the cash value feature of the policy. Overall, cash value policies offer less insurance protection per premium dollar than term life policies. Greater flexibility. You can use the cash value as collateral for a loan. Some people buy cash value policies as a tax-deferred way to build an estate. Whole life policies offer protection throughout a person´s lifetime. They are a type of cash value life insurance. You pay the same scheduled premium from the day you buy the policy. There is no need to renew whole life policies. As long as you pay the premium when due, the policy remains in force throughout your life or until you cash it in. The key characteristic of a universal life policy is flexibility. Within limits, you can choose the amount of insurance and the premium you will pay. Later, depending on the policy value and your financial needs, you can change your premium amount. The policy stays in force as long as its value is enough to pay its costs and expenses. Universal life policies can be designed with "No Lapse Guarantees". If you pay a specified premium, the policy will remain in force for a certain period. Some no-lapse guarantees are to age 100, others are for your entire lifetime, regardless of how old long you live. The cash accumulation of your universal life policy will depend on how much premium you pay, and the interest rate the company pays you on your policy's cash value. Universal life policies have two interest rates - the "minimum guaranteed rate" which the company promises to pay, and the "current rate", determined by the company, which is usually much higher. Equity Indexed Universal Life insurance policies pay interest based on an "equity index" - a stock market indicator such as the Standard and Poor's 500, rather than a "current rate" selected at the company's discretion. Equity indexed universal life policies have the potential for much greater cash-value growth than traditional universal life policies, however, the minimum interest rate guarantees may not be as strong. If your policy has an accelerated death benefit provision, under certain conditions it will pay you the policy´s death benefit while you are still alive. If your life insurance policy contains this type of benefit, you can receive an early benefit payment if you are diagnosed as being terminally ill. The accelerated death benefit can be part of the policy or attached as a rider. |
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