– also known as temporary life insurance and is effective for a specified time period. Term life does not consist of a cash value. Some term policies are renewable, so at the end of the term if the insured desires to keep the policy, they may at a premium that reflects their current age. Term policies may also allow the insured to covert the policy to a permanent insurance if desired.
Types of term life insurance:
- Level Term – The premiums and death benefit are the same throughout the term of the policy.
- Decreasing Term – The premiums are the same, but the death benefit will decrease over the term of the policy. This would be used for protecting against a mortgage or other loan payment that will gradually lower over time.
- Increasing Term – Premiums increase each year as stated in the policy through year ten. Beginning in year eleven the premiums will increase annually based on the insured’s age. This policy may be useful for younger people with less income to provide substantial coverage for a short period of time.
– also known as permanent insurance and has a level death benefit. Whole life policies build a cash value that can (but shouldn’t) be used for loans, retirement income, or partial surrenders.
Common types of whole life:
- Continuous Premium – has a level premium and death benefit until the policy endows or the insured dies.
- Limited Payment – premiums are paid for a designated amount of time and then the policy is paid up, and no more premiums are due.
- Single Premium – Full premium is paid in one lump sum initial payment.
- Joint and Survivor– covers two people under the same policy and pays the death benefit when the second person dies.
– policy with an adjustable premium that accumulates cash value based on current interest rates. The cash value is increased by premiums and the crediting of interest to the cash value. Each month the cost of insurance and expenses to the insurance company are deducted from the cash value.
Two options for Death Benefit:
- Option A – Death benefit is usually level; however the owner can increase or decrease the amount at any time without buying another policy. As the cash value increases more of the death benefit is made up of the cash value. The cash value can only account for a certain amount of the death benefit to qualify as life insurance by law. As the cash value approaches the death benefit, the death benefit must be increased to maintain a legal ratio.
- Option B – Generally an increasing death benefit made up of the face amount of the policy plus the cash value.
– Securities-based life insurance, that is dependent on investment performance of various sub-accounts to which premium has been allocated to gain or lose cash value. The insurer maintains a separate account for the policy owner to allocate premiums and cash value to sub-accounts that enable the owner to invest in various securities portfolios. There are no cash value guarantees and the policy owner assumes all market risk.