The two main forms of life insurance available are “term” and “permanent.” Simply put, term life insurance provides death benefit protection for a specified period of time (for instance, a 10-year term policy). Generally speaking, if a customer is looking for coverage for a short period of time, term life makes sense.If the customer is interested in using the policy as a form of savings, a permanent life insurance policy should be considered. Regardless what type of life insurance is bought, most policies require certain medical criteria to be met.
Term life insurance
Non-Guaranteed Term Life
Non-guaranteed term life provides coverage only for a short time (usually a year) and is pure death benefit protection. The risk with term life is that a person’s health might deteriorate and they could be unable to get another policy once the term is up. Premiums can also increase dramatically as you age. Term life insurance is a good choice for young people who can’t afford the higher costs of permanent insurance, or for people with financial obligations that will disappear in time, such as a car loan or a mortgage.
Annual Renewable and Convertible Term
Annual renewable term insurance policies are for multiple years, usually 10, 20 or 30 years. By buying a longer term policy, costs can be stretched out to avoid the annual increases found in non-guaranteed term life. Convertible term is similar to annual renewable term, but it offers the opportunity to convert the coverage to a permanent policy in the future — when regular term premiums might become cost- prohibitive because of age or health. This is a good choice for young people, who are unable to afford the higher cost of permanent insurance right now.
Permanent life insurance
Whole Life or Ordinary Life
Similar to annual renewable term and convertible term, whole life policies stretch out the cost of insurance over a longer period of time. With whole life policies; however, the costs are spread out over an entire life. Once premiums are paid up, the excess dollars are invested by the company. In essence the insurance company is managing the investment of excess premiums, and that’s why the choice in company is so important.
With this type of policy; however, the inflexibility of premium payments could become a burden if expenses increase or in case of job loss.
Universal Life
This option offers greater flexibility than whole or term life. After the initial payment, the policy holder has the option of reducing or increasing the amount of death benefit. If the policyholder chooses to increase the amount of benefit, they may have to provide medical proof that their health has not deteriorated. Also, after the initial payment, a policyholder can pay premiums any time and in any amount, as long as they don’t miss a payment. In some cases, there are limits to how much extra can be paid in advance premiums.
Since the insurance company can increase charges, it would be wise to manage these policies closely to maintain sufficient funding.
Variable Life
As the name suggests, Variable Life policies offer fluctuating benefits. That’s because the insurance company invests a policyholder’s premiums. The insurance company offers a choice of funds, in which monies will be invested. The amount of money the beneficiaries will receive and the cash value of the policy depend on how well the insurance company invests the policyholder’s money. There are both Universal and Whole Life versions of Variable Life. In most variable and some universal life insurance policies, if investments perform well, the policy will have a higher cash value and death benefit (some universal and variable universal policies also allow the policyholder to add cash value into death benefit). If the investments lose money, the policyholder will have a lower cash value and death benefit. Some policies will guarantee a minimum death benefit. A customer can also take loans against the cash value of a policy, but if it isn’t paid back with interest, beneficiaries will receive a reduced death benefit. Policyholders can also surrender a policy for cash or convert it into an annuity, but keep in mind that cashing in a permanent policy after only a couple of years is an expensive way to get insurance protection for a short time. Look closely at the investment options insurance companies offer for Variable Life policies. Make sure they are well-balanced, and give you an opportunity to invest at your own risk tolerance.
Additional Resources
In the U.S. : National Insurance Consumer Helpline (NICH) (800) 942-4242
In Canada : Canadian Life and Health Insurance Association (CHLIA) (800) 268-8099 (English) (800) 361-8070 (French)