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Summary

This article describes the types of life insurance policies which are available.

  • Term Insurance -- which includes:
    • Renewable Term
    • Convertible Term
    • Level Term
    • Decreasing Term
    • Adjustable Premium
  • Permanent Insurance
    • Whole Life Insurance -- which includes:
      • Participating Whole Life
      • Non-Participating Whole Life
      • Flexible Premium Whole Life
      • Limited Payment Whole Life
      • Single Premium Whole Life
      • Interest Sensitive Whole Life
    • Universal Life
    • Variable Whole Life
  • Individual Life Insurance
  • Group Life Insurance

If you don't have life insurance, you may still be able to purchase it -- even with a history of a serious health condition.

NOTE:

Term Insurance

Term life insurance is old fashioned, pure, life insurance. There are no additional features to a term life insurance policy so every penny of the premium you pay goes to purchasing life insurance.

Term life insurance is issued for a specific period of time. The period of time (also known as the "term"), may be as short as 1 year, or may be issued for longer periods such as 5, 10, or 20 years.

The premiums for a term life insurance policy are usually guaranteed for a certain period of time, though not always for the full length of the "term".

The various types of term insurance include:

Renewable Term

Like any term life insurance policy, a renewable term life insurance policy is written for a specific period of time. The owner is given the right to continue ("renew") the coverage beyond the end of the original term. For example, if you purchase a five year renewable term policy: at the end of a five yea period, you have the option to continue the life insurance for another five years.

The right to renew is usually guaranteed unconditionally. This means that you will not be required to show that you are medically insurable at the time of renewal. Thanks to this feature, any health condition that showed up since the policy was issued is not relevant.

A renewable term policy either renews at the same premium as paid during the original five year term or at the company's then current rates. The rates will not take into account changes in your health since the issuance of the policy.

Convertible Term

A convertible term life insurance policy is one which includes the option to convert to a permanent type of insurance policy at the end of the term. With a permanent life insurance policy, as long as you pay the premium, the policy remains in effect. For example, if you purchase a five year convertible term policy, you will have the right at the end of the five years to convert the insurance to a permanent policy issued by the insurance company.

Premiums generally increase when a term policy is converted into a permanent life insurance policy.

If the right to convert is exercised during the time indicated in the plan, you will not have to provide any medical information to obtain the permanent coverage.

Level Term

A level term life insurance policy is one in which the face amount (the death benefit) benefit remains the same during the duration of the term, no matter how long the terms is.

Decreasing Term

A decreasing term life insurance policy is one in which the death benefit decreases at specified times during the duration of the term. For example, you purchase a $100,000 decreasing term policy for a ten year term. When the policy is issued, your beneficiaries would receive $100,000 if you died right away. However, the amount of the death benefit decreases over the period of time. By the end of the ten year term, the amount of your insurance will have been continuously reduced and may, for example, only provide a death benefit of $10,000.

Premiums for decreasing term life insurance policies remain the same over the duration of the term even though the amount of insurance decreases.

Decreasing term life insurance policies are useful when the need for which the insurance is purchased decreases over time. For instance, decreasing term policies are often issued to track decreases in mortgage debts.

Adjustable Premium

An adjustable premium life insurance policy is one in which the amount of the premium can change ("adjust") over the course of the term. The premium could go up or down.

The permitted change follows a formula based on calculations that are defined in the policy.

It is possible to reduce the amount of insurance (and thus the amount of the premiums) if at some point the premiums increase to a level that you cannot afford.

Permanent Insurance

The distinguishing feature of "permanent insurance" is that the insurance premium purchases more than just pure life insurance. For example, the policy may have a savings feature under which part of the premium pays for pure life insurance and the other part goes into a savings feature. This savings feature is known as a "cash value." You can borrow against "cash value" at a preset rate of interest.

Permanent Life Insurance is generally issued for the insured's entire lifetime, as opposed to term insurance which is issued for a specified number of years.

There are various types of permanent insurance -- all of which are a variation on the basic theme of pure life insurance plus bells and whistles of one sort or another. Some of the more common include:

Whole Life

A whole life policy is issued for the insured's entire life. This kind of policy can also be issued only until the insured reaches a specified age such as 95 or 100. In these instances, if the insured lives to the age mentioned in the policy, the insurance company will treat the situation as if the insured died at that age and will pay the face amount of the policy.

A whole life policy will indicate the premiums, death benefit, and cash values for the duration of the policy. There can be a number of variations of whole life policies. These may include:

  • Participating Whole Life: A participating whole life policy is one which "participates" in the insurer's earnings -- such as through a dividend. How the participation is determined is defined in the policy. Dividends are not guaranteed. Instead, they are based on the economic health of the insurance company.

Dividends can generally be paid in cash, be used to reduce the premiums, to purchase additional insurance without medical questions, or can be left to accumulate.

  • Non-Participating Whole Life: A non-participating whole life policy features a level premium and a level death benefit as long as the policy exists. A non-participating whole life policy does not participate in the insurer's earnings or pay dividends.
  • Flexible Premium Whole Life: A flexible premium whole life policy is one which permits the insurer to adjust premiums based on how well the insurer's cost and earnings projections come true. As reality changes, the premium may be adjusted, but cannot be raised above the maximum specified in the policy.
  • Limited Payment Whole Life: In a limited payment whole life policy, the premiums are only payable for a limited period of time which is less than the duration of the policy. Essentially, you pay a higher premium for a shorter number of years, at which point payments cease but the insurance remains in effect.

These policies can be issued for your entire life or to a specified age.

  • Single Premium Whole Life: In this kind of policy, you pay one premium when the policy is issued. No more premiums are payable. The term of the policy lasts to a specified age or for your entire life.
  • Interest Sensitive Whole Life: An interest sensitive whole life policy is one which will take into account current economic factors as opposed to being issued solely based on long-term projections. Costs and benefits can change as a result of both favorable and unfavorable economic conditions. Interest sensitive policies include Universal Life and Variable Life Insurance Policies (which are described next.)

Universal Life

A universal life insurance is one of the most flexible types of policies that you can purchase, permitting changes in premiums as well as face amounts. A universal life insurance policy combines elements of both term and permanent policies. Premiums are sensitive to changes in the insurer's earned interest.

Universal life policies work by letting the insured mix and match the three major elements of a life insurance policy: premium, death benefit, and cash value.

  • Premium payments are credited to a cash value account. The insurance company then periodically deducts money to cover expenses and the cost of the insurance protection. This is generally known as the mortality deduction charge. The balance of the cash value account accumulates at a rate of interest which is set in the policy. A minimum interest rate and a maximum mortality deduction charge are both guaranteed by the insurance company.
  • Owners of Universal life insurance policies should monitor the policy for fluctuations in the valuations and costs. For example, some people use the money in the cash value account to pay the premiums. Not all insurance companies will inform you when your cash value is insufficient to cover premium expenses. If this happens, the policy could lapse for non-payment of premium. If this were to happen, you would need to reapply for coverage and show medical evidence of insurability. Bottom line: If you have been diagnosed with a serious health condition after taking out the policy, do not let it lapse!

Variable Life

A variable life insurance policy is one in which the death benefit and cash value are specified in units instead of dollar amounts. The value of the units, and thus the death benefit and cash value, can increase or decrease depending upon the results to which the units are tied. For instance, the unit could vary with the value of the Dow Jones average. If the Dow goes up, so does the value of the unit, and thus of the death benefit. If the Dow goes down, so does the value of the unit.

The idea behind a Variable Life insurance policy is to protect against loss in buying power due to inflation by creating a policy where the amount of the death benefit can reflect variations in the securities markets.

Individual Life Insurance

An Individual Life Insurance policy is one that you purchase on your own either through a life insurance agent or directly from the insurance company. There are all kinds of names for various policies, but they all boil down to only two types of life insurance: term insurance and permanent insurance.

Group Life Insurance

Group life insurance is insurance that you purchase through, or is provided by, a group -- such as an employer, union, bank, school, association, or other type of organization.

Generally:

  • The "group" which offers the coverage is the owner of the policy. Each insured is a "certificate holder" for a specified amount of coverage.
  • The certificate holder (you), has the right to name the beneficiary.
  • If you leave the group for any reason (including for disability), you generally have the right to convert group life insurance to an individual permanent type policy.
  • There are seldom health questions asked when purchasing group life insurance.
  • There may be a waiting period during which death caused by a pre-existing condition is not covered.

Most group life insurance policies are term insurance, although some are universal life.

Group Term Insurance:

  • Just like individual term insurance, group term insurance is issued for a specified period of time and may contain a right to renew.
  • Group term insurance generally includes a right to convert to individual coverage at the end of the specified term (or if you leave the group)
  • Group term insurance is always owned by the group offering the insurance. The group, as owner of the policy, will take care of the administrative functions of maintaining the policy. However, you may periodically be required to indicate your desire to renew or maintain your coverage. If offered through an employer, the request for you to renew your interest is often done on an annual basis or during what is known as an "open enrollment period."

Group Universal Life:

  • Group universal life insurance is usually an individual policy issued to each of the qualifying members of a group. It is considered group insurance because it is offered as a result of participation in the group which is offering the coverage, generally an employer.
  • Just as with individual universal life insurance, group universal life is a flexible product, allowing changes to both face amount and premiums.
  • Premiums are usually payable to the employer, or group, which may contribute a portion of the cost.
  • A group universal life policy can often be continued indefinitely by simply making payment of the premiums directly to the insurance company - even if you are no longer a member of the issuing group.