When it comes to shopping for life insurance there are several types of plans available.
However, the two basic types of life insurance policies are Term Life and Whole Life.
Below is a review of each type of life insurance plan with a complete explanation of how they work.
Term Life Insurance
Term insurance is the most basic type of life insurance. It is referred to as pure protection because it is priced to reflect only the probability that the insured will die during the policy period, or term.
Term Insurance has Four Characteristics:
Temporary Protection – 1, 5, 10, 15, 20 or 30 years, or until the insured reaches a specific age, such as sixty-five or seventy.
If the insured is still alive at the expiration of the term period, and the policy is not renewed for another term, the insurance protection expires.
No Cash Value or Savings Element – The insurance provided is pure protection and cash values are not accumulated.
Renewable and Convertible – Most term policies are renewable and convertible. Renewable means the policy can be renewed for additional periods without evidence of insurability (no exam needed).
However, insurers typically do not allow renewal after age sixty-five or seventy. Convertible means that the term insurance policy can be exchanged for some type of cash value life insurance with no evidence of insurability.
Premiums Increase with Age – Term insurance premiums are based on the mortality (or death) rate. Since the death rate increases with age, so must the term insurance premiums. This means, the longer you wait to buy a policy, the higher your annual premium for coverage.
Types of Term Insurance
Yearly Renewable Term – The life insurance policy is issued for one year. The policy owner has the right to renew coverage for successive one-year periods.
5, 10, 15, 20 and 30 Year Term – Term insurance policies can be issued for a specific period, such as five, ten, fifteen, twenty or thirty years. The premiums remain level during the policy term.
However, if the policy is renewed at the end of the term, the premium will increase.
Term to Age Sixty-Five or Seventy – Term to age 65 or 70 provides insurance to a stated age. The premiums remain level during the policy term, and the insurance expires when the stated age is reached.
Decreasing Term – The premiums remain level during the policy term, but the face amount of life insurance gradually declines each year, over time.
Whole Life Insurance
Whole life insurance has level premiums, provides lifetime protection to age 100, and has a savings element.
There are two basic types of whole life insurance: Ordinary life insurance and Limited payment life insurance.
Types of Whole Life Insurance
Ordinary Life Insurance – A form of whole life insurance in which the premiums are level, and lifetime protection is provided, to age 100. If the insured is still alive at age 100, the face amount is paid to the policy owner.
Limited-Payment Life Insurance – The premiums are level but are paid only for a certain number of years. After that time, the policy is paid up.
An endowment policy is the third basic type of life insurance.
An endowment policy pays the policy proceeds to the named beneficiary if the insured dies within a certain period; if the insured survives to the end of the stated period, the policy proceeds are paid to the policy owner.
Other Life Insurance Policies
Universal Life Insurance
Universal life insurance is a form of whole life insurance sold as investments that combine insurance protection with savings.
Universal life insurance can be defined as a flexible premium deposit fund combined with monthly renewable term insurance.
Universal Life Insurance has Several Basic Characteristics:
Variable Life Insurance
The face amount of life insurance varies according to the investment experience of a separate account maintained by the insurer.
The premiums are invested in stocks or other investments. If the investment experience is favorable, the face amount of insurance is increased.
If the investment experience is unsatisfactory, the amount of insurance may be automatically reduced. However, the amount of life insurance can never be reduced below the original face amount.
Variable-Universal Life Insurance
This type of life insurance policy combines the features of variable and universal life insurance. The policy characteristics are similar to those of a universal policy with two major differences:
Adjustable Life Insurance
A whole life insurance policy that permits changes to be made in the amount of life insurance, period of protection, amount of premium, and duration of the premium-paying period.
The policy owner may be able to make the following adjustments to the policy:
Modified Life Insurance
A whole life insurance policy in which the premiums are reduced for some initial period, such as three to five years, and are higher thereafter.
Family Life Insurance Policy
A family policy is a whole life insurance policy that insures all members of a family under one policy. The policy is usually sold in units that state the amount and types of life insurance on the family members.
Source: Personal Insurance – INS 22 (Second Edition)
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