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Life insurance provides financial protection for loved ones should the policyholder die. Once a policy is issued, an insurer may not cancel it based on a change in the policyholder’s health status. There are several types of life insurance, allowing consumers to find a policy type that works for their personal situation.
Term Life Insurance
Term life insurance provides coverage over a specified period of time. Typically, term insurance policies are written for 1, 5, 10, or 20 years, or to a specified age (such as 65). Term policies only pay a death benefit to the beneficiary if the policyholder dies during the specified term and so is a good choice when the policyholder needs protection for a temporary time or a specific need. Term insurance has the advantage of being more affordable than permanent insurance, particularly in the early policy durations. There are a few different types of term life insurance policies:
- The most common, level term insurance, is characterized by level policy face amounts over the contract term period, usually 10, 20, or 30 years. The death benefit amount and policy amounts are usually guaranteed to remain level during this time, regardless of the insured’s health status.
- Decreasing term insurance policies feature a decreasing death benefit. A policyholder may use these types of policies to cover financial obligations that decrease over time, such as a mortgage.
- Renewable term insurance guarantees the policyholder the right to renew at the end of the contract period without evidence of insurability as long as the premium is paid.
- Convertible term insurance allows the policyholder to convert a term insurance policy to a permanent insurance policy that will build cash values in later years. Typically, these premiums are higher to reflect the additional cost of building up cash value for the policy.
- Term insurance policies can also have a Return of Premium (ROP) feature which refunds part or all of the premiums paid at the end of a level term period if death benefits are not paid out. Policies with this feature are more expensive because the policyholder has the ability to receive cash back.
Whole Life Insurance
Whole life insurance provides a fixed amount of insurance coverage over the life of the insured, with the benefits payable only upon the insured’s death. Whole life policies are designed to build tax deferred cash value, which is the accumulation of premiums collected less applicable expenses and applicable insurance charges and they allow for borrowing against the cash value of the policy. As mandated by state law, whole life policies contain nonforfeiture values payable in cash or some other form of insurance in the event the policy lapses from nonpayment of required premiums or the policy owner decides to surrender the coverage. There are several types of whole life insurance policies.
- A nonparticipating whole life insurance policy does not pay dividends to the policy owner, but rather the insurer sets the level premium, death benefits and cash surrender values at the time of purchase. These amounts are fixed at policy issue.
- A participating policy allows the insured to share in the insurers investment, expense and mortality experience by providing dividends used to reduce premium payments or to purchase paid-up additional insurance. The dividend options make these policies both more flexible and more expensive than nonparticipating policies.
- Indeterminate premium whole life insurance is a nonparticipating policy featuring adjustable premiums which are set annually and reflect the insurer’s mortality experience, investment earnings and expenses, although they may not exceed a guaranteed maximum rate. Premiums generally start out lower than other whole life insurance types.
- Ordinary level premium whole life insurance features premium payments that remain consistent until the death of the insured or attainment of a terminal age when the cash value equals the face amount of the policy.
- Limited payment whole life insurance can be either participating or nonparticipating. Premiums are paid over a shorter period, but still retain lifetime protection. These policies have higher premium amounts and accrue cash value faster than ordinary life policies, since they are paid over a shorter period.
- Single premium whole life insurance is a limited payment whole life policy allowing insureds to purchase guaranteed lifetime protection for a single upfront lump sum payment and thus have an immediate cash value.
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